Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby. Welcome aboard everybody on what has got to be one of the most interesting weeks, one of the most interesting periods for investors and investment markets in a long time, more intriguing, more perplexing. Occasionally I think more concerning, believe it or not, than the COVID downturn. And that's
saying something. Now as we speak, we've had some relief, right We've had the first a bounce on Wall Street overnight ten percent, ten percent in a single session, basically going in on Wall Street and the Australians share market will no doubt copycat that today and as always it
won't do as much. It'll do five or six percent and then we then it's at that point we'll see where we are well done on any of the investors who went in early in the week, and we had Jemma Dale on the show talking about how retail investors as opposed to big investors were in the market buying more than selling earlier in the week, so as a trade that was successful. The issue now is I think we have to take a deeper dive because this is not over by any stretch of the imagination I expect.
My guest today is doctor Sam Wiley of the Windlestone Education Group, a principal fellow at Melbourne Business School, and I think it's worth saying something of an eminent name within investment markets who has lectured and mentored several of the people who are regular guests on this show. I found out after he was on the last time. How are you Sam?
Very well, James, thanks for emboding me.
Great to have you so here.
We are.
It's quite a remarkable period. And all the discussion in the last show, which you should listen to if you get a chance, was about the nature of the drop so far. That is, at the time markets were down about ten percent on the ASX and fifteen percent on the on Wall Street. But I suppose a million dollar question is whether this is a convention to share market drop or something different.
Well, it's quite different to some of the previous crises we've had. So the dot com bubble that was a genuine bubble, mostly in the Nasdaq stocks NAZDAK went up from it from seven hundred and nineteen ninety six to five thousand, where it peaked in March of two thousand. That was a genuine bubble. Didn't go up as much in the S and P five hundred, but the Nasdaq
stocks were people just got too excited. And then in the GFC, that was a banking crisis, and banking crisis are hard to reverse and that so that went on for a long time. The dot com bubble passed pretty quickly. GFC went on for a long time. COVID, of course, was a global pandemic that no one saw coming, and very dramatic action was taken by central banks and governments which reversed the fall in the stock market and then
sent it a lot higher. And what we have at the moment is really a policy mistake, depending on your point of view on this, but maybe I shouldn't characterize it as a mistake, but it certainly the effects of the policy of President Trump in introducing the tariffs and the concerns that those tariffs will create stagflation, the inflation plus slower growth. So they're really four very different types of crises. No one of them is like the other ones, and the effects and how long it takes to go
away are different. In those different crises.
Is there any implication in what you're saying that in a way, it's become a sort of flashpoint of unknowns, don't they. So there's this issue where people just don't know, and so everyone reacts in a different way. The issue for our investors, i'm sure, is whether it should change the nature of their approach to markets, because in the
immediate history, right we've had some very good years. We've had a string of double digit years on super fund returns, for instance, and SMSF investors whom many of who listened to the show, would have had some good years as well.
And in some ways it was a relatively easy ride, and I think there was a surprise perhaps how well the markets came out of COVID, and then there was a run up to the positive anticipation, positive anticipation that Trump as a Republican president, would unleash all sorts of positives for the market, deregulation and tax cuts, et cetera. That's not the agenda right now, whatever is going on
in terms of this sprinksmanship. As we talked this morning, there is absurd levels of tariff sitting in place between the two most important economies in the world. So what's the Does this mean investors should change their disposition?
Well, look, here's here's how I say it, James, is that investors should be in the market for the long term. I should get invested, get fully invested, and stay fully invested, and not try to time the market. The ability to time the market, which is as you know called beta, is the ability to jump out of the market before it goes down and into cash, and jump back from cash into the market just before it goes up. Now,
a lot of people think they've got that ability. Hardly anyone has, and that's been shown not just by academic research but by the practical circumstances and experience over and over. Alpha, which is the ability to choose between assets within an asset class, like to choose between BHP and Rio, or City Bank and Bank of America, or Tesla and Nvidia, choosing within the asset class of US shares or AUSI shares.
That's alpha.
There is a lot of alpha out there, and that's the value that savvy investors can create. But jumping in and out of the market is a great way to do two bad things. One to be underinvested over long periods of time, and two to realize capital gains early. So look, I think that the volatility in the market which will go on from here, President Trump's agenda is very radical and he'll only be constrained ultimately by the Supreme Court and buy the markets and by nothing else.
And he really does have a radical agenda, and it didn't end last night, So everyone should buckle up. But that volatility gives people an opportunity. People who are out of the market, who are not fully invested, don't have as much invested in US shares, especially as they'd like to buy the dips to get ready for falls in the market, have in their mind trigger points at which they're going to buy in and then act on that.
And you're talking about retail investors doing an amount of that recently, And so I think that's a good idea. That's the way to think about the volatility. Be fully invested. But if you're not fully invested, see the volatility as an opportunity.
Can I throw a bare case? Can I throw the warriors scenario at you, which is we mentioned to a wait because a lot of our listeners are younger and didn't endure the difficulty of that period where this market felt by fifty percent, And as we mentioned on earlier in the week, it wasn't that it felt by fifty percent, but it was that it took a year and a half to do it, and it was even longer than that before realized, before people realized it was finally over.
Now we can look at the news this morning and it's all very well, there's a big bounce and all that, and everyone is smiling that the market's gone up. But only twenty four hours ago there was some very people I would take very seriously, and they were deeply concerned about one thing, which is this that bond prices were falling at the same time as share prices were falling. And this is not supposed to happen, and it happens
at times of extreme pressure on investment markets. And the particular fear, the big fear this time round, is that should the rest of the world, particularly China, withdraw its de facto support for the US through the bond markets where there are this gigantic holder of US treasuries. Is that a fringe concern or is it a concern that should be on the table.
Well, in general, I would say if you take if we zoom out and take the longest view of the US market. I think that in ten or twenty years time, we'll look back on this period and we'll see the volatility of President Trump's radical agenda and even to a certain extent, COVID as the COVID pandemic, as things that were overlaid on something bigger. And that's something bigger is AI and US tech dominance. And I think that's really the long term picture investors should be thinking. Investors should
be member. The biggest mistake that investors made in aggregate in the twentieth century was to be underweight US equities, and that was especially true of non US dollar investors.
You know that. I know you know this, James. But in nineteen thirty a British pound was worth five dollars and now a British pound is worth about a dollar twenty So British investors, and this is true of Australian investors as well, not only got the benefit of the US markets doing so well, the US stock market doing so well in the twentieth century, but they got that fort four times uplift in the depreciation of the pound against the US dollar. And I think there's a danger
that investors make the same mistake. The biggest mistake in the twentieth century was to be underweight US shares, and I think that's likely to be the biggest mistake in the twenty first century, because it's going to be about tech and US tech dominance is accelerating and getting deeper, rather than the opper so zooming out and taking the
longest view. This episode with President Trump, which will go on probably for the whole of his four years, will be overlaid on top of something that is deeper, more enduring, and more important, and that is to have exposure to US tech dominance in the twenty first century. And you saw an amount of that last night. The reason the market bounced back so much, or a significant reason, is that people don't want to be out of the market.
They've been forced out of the market by just the difficulty of President Trump's actions and the danger that if he would not if he wouldn't take a backward step, then the market would have to go down further. But as soon as they had an opportunity to pour back in the market, they were back in.
You're not concerned that the US sort of imperial like dominance of the markets and it's how it has ruled up from being whatever it was, fifty percent of the global market to well over sixty percent of the global market now. And it's complete domination of guilts or bond markets as they are. You're not concerned that is on the way, or that the technology pre eminence that drives the entire US market is perhaps threatened by by deep seek for instance in AI, by byd in car technology.
Yeah, I'm not basically, But what on the lies US tech dominance is the education system, you know, the fantastic university system, It's Silicon Valley, and the ability to raise huge amounts of capital for projects. It's the cultural inclination to have a go and to not fear failure.
I mean, I have no problem what you're saying, and I think it's worth mentioning to listeners that this is not You are not just some in here from some distance. You were at the top business school.
Weren't you at Dartmouth? Yep?
Dartmouth actually was from from nine at ninety seven to two thousand and four.
I was at Dartmouth And was it that period that formulated these views for you?
It was, and you know, traveling in the States a lot at that time, and you know, going over to California into Silicon Valley a lot, and even seeing the US education system because you know, we had two young children just starting primary school at that time and they and just seeing the way that children are encouraged to have a go and do not fear failure. It really is quite a remarkable cultural thing. Not everything about US culture is fabulous, by the way, but I'll tell you
working in the US is terrific. Like the confidence to be able to take on complex things. Working there really is the best thing.
You weren't concerned that the move to tariff's was actually a contradiction on that that it was protectionist, defeat retrograde compared to the best aspects of the US that impressed you overall.
I think it's foolish to introduce the tariffs and the way that it's been enacted by President Trump, that the backwards and forwards nature of it, and also the belligerent nature of it, I think is maybe foolish is too strong a word, but that's certainly not ideal, and the we shouldn't think that there isn't a coherent strategy here. I think the tariffs are really about these things. It's about raising revenue so that the president can cut taxes.
It is about reassuring a US manufacturing and fulfilling a promise to the Magabase. And especially it's about isolating and constraining China. And look, we saw that overnight. So President Trump said that the ten percent based tariffs are going to remain, that the additional tariffs that were nounce on the second of April are going to be suspended for a period of time. But nothing changes with china one hundred and twenty five percent tariffs, And so a lot
of it is really about China. In the US switched from a policy of engagement with China to containment of China during the President Obama's administration in twenty fourteen, and then President Trump won, and then President Biden and now President Trump two have continued that policy of containment. And this is President Trump's agender is very radical. It's been rolled out in the President's usual belligerent manner, but it's completely consistent with a policy that really started in twenty
fourteen of containing China. So we shouldn't think look, I think overall it's foolish the policy, but we shouldn't think that it's not a coherent strategy.
Okay, very interesting, We've take a short break of what we're going to do folks. In the next section is going to look how this affects you and in what way you may make moves around the basic principles that have been outlined by Sam.
There.
And interesting that notion of the consistency of the towers. It's not like they were never there. They've been there in place, particularly in relation to China for some time. It's the global globalization of them, if you like that. Pus the shock so far. Okay, back in a moment. Hello, Welcome back to The Australian's Money Puzzle. James Kirby here with doctor Sam Wiley. Now, Sam, the one thing you said there is interesting. I'm just thinking about allocation for
our investors. Whether you know, people were coming up to me during the week asking about whether they should be in growth or conservative of balanced funds when they have been in big super and of course self managed super funds. Some are taking some were some were just going to cash, some were nibbling as they say, and some were making some really you know, structural moves like setting gold and
buying ETA for instance. Now, one thing you said that I thought was really interesting about sticking with the US market the Australian super and the big super funds, but Australian Super in particular has come out in the thick of this crisis and the darkest well, the first what might be the first phase of dark days a few days ago when the markets were falling and they said
we're sticking with the US whatever. Mark Delaney, head of Australian Super, it's got literally got news around the world because there was very few, very prominent managers saying we're sticking with the US. So that's a point I think that I need to drive home. Should every day in versitors look deeper in the US in terms of single stocks or is it more like an index approach?
Look, I think in thinking about allocation of shares across US shares global shares, let's think of global shares as big. Any thing that's not US and Australia and Australian shares, then the largest part should be in US shares and in Australian chairs and the US For the reasons I was talking about before, it's a big mistake to not participate in the tech surge in the twenty first century, much of the value of which is going to be expressed in the US public markets. Created and expressing the
US public markets. It's a mistake not to have a significant allocation to Ossie shares, and the reason for that is that the Australian resident, Australian tax residents like you and me, James and most of your listeners get the benefit of franking credits. So foreign investors own slightly more than fifty percent of the whole of the Australian stock market. They're happy to own Australian shares when they could buy shares from anywhere in the world. They're happy to own
Australian shares, but they don't get franking credits. So when we own, when we own Australian shares, we get what they get, plus the extra gravy of the franking credits. So it makes perfectly good sense to have a significant allocation to Australian shares and then to the rest of the world. Europe is looking up a bit. Emerging markets haven't done very well in the current crisis. Isn't helping them?
Isn't helping them so much? But I think Mark Delaney is making the right call and he is getting He is getting investors ready for the possibility that Ossie Super won't be one of the two or three highest performing funds in this particular year like it usually is because of their high exposure in their balance funded, in their growth fund to US shares. But he's saying, we're going to ride through that and we're going to take the
long term view. One thing that Ossie Super doesn't do, or does do that it is unfortunate, is that they hedge out the foreign currency risk. They hedge out the effect of the Aussie dollar going down. Now that's unfortunate because it's better to be unheedged. One of the reasons that you want to own foreign assets is that you
want protection against the Aussie dollar going down. When the assiegolar goes down, if nothing happens to your US shares, the new us as are just worth more, and it'd be better if they didn't hedge out the Ossie dollar exposure. And most of your listeners should not be hedged for Ossie dollar exposures.
They probably aren't edged, but if they were given the choice between two funds and one was hedged and one was unhedged. You're saying God for the unhedged every time?
Are you go for the unhedged every time?
It's okay, very interesting.
You want some exposure to most of your exposure is to the Aussie dollars in your income here I'm speaking to our listeners, of course, in your income and in the ownership of your assets, most of your exposure is to the Aussie dollar. You want some exposure to other currencies and especially to the US dollars. Simple diversification. And if you hedge, you are unwinding that diversification and it won't help you.
It's very straightforward.
Look, the super funds do it because they're compared to each other. It's just an unfortunate equilibrium where they all hedge and none of them will break away from that because of the danger that they'll underperform. Free thing for them to do is to do what all the other super funds.
Do and do there fully hedge sam like fully.
It varies across the big funds. Ossie Super is fifty to sixty percent hedged, and but other funds, some other funds are one hundred percent hedged.
Yeah, okay, very interesting. Well, we're going to bolt around now, folks, because I've got some on the show. It's an amazing week. I want to talk to you about a couple of things and it'll be busily quickfire. But there what doing. Gold has been great. We all know there's no yield off gold, but hey, it's been great this last few months. Where do you stand on gold?
Weok, it's been awesome, especially in Australian dollar times. It's gone through five thousand Ossie dollars. It was in two thousand and four it was five hundred Australian dollars and now in twenty twenty five it's five thousand Australian dollars. So it's been absolutely awesome. The gold has been mostly in the last couple of years, and this is true a bitcoin as well, and why people sort of group
them together. Now there's been an alternative to the US dollar, and especially people who are concerned about burgeoning US debt. There's definitely a debt time bomb in the US, and people who are concerned that, or a lot of investors want to have some exposure to gold maybe bitcoin as well, because when that bomb finally explodes at some stage and the markets revolt against the growing US federal debt. Then they'll be glad that they had a safe haven away
from that. Now do I mean to say that you shouldn't be invested in US shares because that would be contradict but I said earlier I don't mean that. But what I mean is that at some stage it's going to be a big problem with US debt. The US will get through it. We should all be confident of that. But in the process, people are going to be glad that they had exposure to something alternative to gold and
to bitcoin. So and then look at the moment. Gold and bitcoin both went down in the current crisis, which is kind of surprising in it, and bombs went down as well.
Which the last few days.
Yeah, You're earlier.
Point was that everything went down, even treasury bonds went down, gold and bitcoin went down. It was a sell everything moment and go to cash. People's concern about the president's radical agenda. Yeah, and this is bitcoin and gold exhibit that as well.
But you don't worry that the BONDDUS bawn market could have a major outflow.
I don't think that's going to happen anytime soon. It's just too large and too much the safe port in a storm, ultimately too much of the risk free asset for global investors. I don't worry that's going to happen anytime soon. Look, I actually think James, that what's going to happen. What we don't know is, I'll just be
very brief here. What we don't know is whether we go back in the post COVID world, whether we go back to the pre COVID world of powerful deflationary forces where interest rates get cut close to zero, where central banks introduce quantitative easing to try and fight deflationary forces, trying to fight inflation falling too low. That was the pre COVID world, whereas the pre GFC world was one of trying to fight inflation and of higher interest rates. And we don't know yet, and maybe we can talk
about this another time. We don't know whether we're going to go back to pre COVID of low interest rates and fighting deflation or pre GFC of higher interest rates and fighting inflation rather than deflation. It's a very large open question. Sorry I didn't answer it. Who were trying to big brief?
Be nice if you could answer it. But you're talking about US rates there. We'll put Australian Australian's particular local issues to one side for the moment. You're talking global rates led by the Fed Reserve.
I am, but deflate deflationary forces, which you know from the GFC to to COVID. Interest rates were down, you know, before COVID came along. This is in September, on the first of October twenty nineteen, three months before anyone knew the COVID even existed, the cash rate in Australia was zero point seventy five percent.
People forget that the opsode I expect is at this time there is at least the capacity to cut rates should rates need to be caught.
That's absolutely right.
And it's also true that there's capacity for quantitative easing, because not only has the Fed put interest rates up, but it has unwound the quantitative easing that was undertaken in COVID. So it really does have a couple of shots in the locker, so to speak.
It has sort of reloaded.
Its ammunition to fight to fight these things, which that is.
A healthy state of affairs, without a doubt.
But as you say, it is only a scenario in which that might be needed, all right, okay, well take a break. A couple of questions I do want to put in front of some which i've sort of killed specifically for him back in a moment. Hello, Welcome back to The Australian's Money Puzzle. James Kirby with doctor Sam Wiley. He's been on the show before. You might remember Melbourne Business School and the windle Stone Education Group.
Sam.
I wanted to ask you before I talk to listeners questions. Have you any concerns about big super funds, about how they're too big, that they are perhaps not as sophisticated in their ability to deliver pensions to have a cybersecurity of top notch. Basically, they became very big, they were very good at accumulation and they are to some extent at a moment of concern where they're not as complete as we need them to be. At this point in time, they've become so enormous.
Look, there is a problem. Just to go first, James to the size issue. They are consolidating and I think that'll go on. We'll get down to seven or eight very large super funds.
These too.
Can here about the industry funds, there's still about thirty industry funds. There used to be about one hundred and fifty, but I think we'll get down to seven or eight very large ones within the next ten to fifteen year. Size works for them in two ways. One, it allows them to make better investments into private assets, or we could call them alternative assets. Infrastructure, private equity, venture capital, hedge funds, private credit. All of those are private assets.
Sometimes people call them alternative assets, but I mean you take infrastructure for instance, so Ossie Super with a couple of other super funds bought Sydney Airport for twenty two billion dollars. Now you can only do that kind of thing. You can only buy those buy into those large infrastructure projects if you've got scale and in the industry funds. One of the best reasons for being in an industry fund is because you get access to very high quality
private assets infrastructure, private equity, venture capitalist. Another thing is it's allowed them to internalize their investment teams. So Mark Delaney manages about sixty percent of their money now internally with his investment teams. And Ozzi Souper has opened a big office in London, a big office in New York,
an office in Shanghai. They didn't office open one in Mumbai, interestingly, but they now have a global footprint, very good, very high quality private assets and internalized investment teams which cuts costs. What they don't have is good tech. You know, if you were to compare the tech, I don't mean to single out Ossie Superhare any of them, it would be true if you compare the tech that Ossi super has to the tech that the Commonwealth Bank has, I think
it's you know, the light years behind. And a lot of that is because they just have very skinny fees. They don't have enough money to spend on tech, and tech is really letting them down. It's letting them down in customer service and they've been in trouble with Appera an Assic because of that and be fine because of it. And again I don't mean to single out Aussie suber this is two of all of the big industry funds and it's let them down with cybersecurity.
Or at least their choose to not invest to keep their fees little. It would seem that's correct.
Yeah, okay, And now that is that decision is proving quite difficult and can get and it'll get worse of course because we'll become more and more reliant on tech. The cyber attacks that they suffered the other day, it's partly understandable because the cyber attacks went to people who are retired, you know, people who are And of course there's two factor authentication. You go to change your password and you get a text or an email or a phone call saying, you know, can you authenticate that it's
you who's making the change. But someone who's eighty three years old gets a text they're not paying attention, right, or they get an email and they don't and they look at their email once every three months when their grandkids come around and do it for them. And that's the So it's kind of understandable. You're dealing with people who are not very tech savvy and using tech solutions. Then two fact authentication it is tricky for them. But the main issue is under investment in tech.
Okay, all right, I think folks, in terms of the questions, Lucas and many others I'm sure wanted to ask about how to be prepared for downturn on what to do? I think we cover that in the first part of the show. I also want them how Luke has made the point that he thinks to him that I had inferred in print and elsewhere about that if you if you were unhappy with Big Super, that you know the
SMSF option is there. Luke is saying the SMSF is unnecessary for listed assets and that many people have said that they would prefer the security of a big fund to an SMSF if in the event of sort of a tech nightmare will leave. I think that's an open question, except to say, to bring everyone up to speed, oz Super has said to the unfortunate woman pensioner who lost four hundred thousands that cyber attack, that they will ref her completely. All right now, So we're getting one more question,
which is from Tom. I believe, says Tom, that the US Treasury has recently bought two thousand tons of gold Australian gold for delivery. I've been trying to work out what they are hoping to achieve reduce US federal interest desk. He says, could you help me understand this? So central banks by gold all the time, First of all, you might explain why they do that and whether it supports
the gold price. And maybe in terms of Tom's question, there was that strange bout of activity where they were rushing the gold over to the US because they thought the gold might be hit with tariffs, I think, but what was your understanding of it?
Well, if we take the IRBA, the Reserve Bank of Australia for instance, the ABA holds gold, an amount of gold on its balance sheet, and it holds foreign currencies as well. And that's because the ABA, as well as being charged with maintaining stable inflation and employment, as well as having that as it's remet, it's also required to stabilize the Aussie dollar. And so to stabilize the Aussie dollar to buy when it's falling and to sell when
it's rising, which it will have been doing recently. It would have been buying into the Aussie dollar falling from sixty three to sixty cents and then selling in it rising again last night. As well as having a foreign currency to do that, it helps to have gold to do that. So the RBA and most central banks own
an amount of gold to help to stabilize their currencies. Now, the US has the privilege of being the world reserve currency, so it's the thing that everyone wants to stabilize against, and so they don't really need to hold gold for that purpose. They have a lot of gold left over from the US dollar being pegged to gold and the
unwinding of the pegging of the US dollar. The ability to convert US dollars into gold started in the nineteen thirties and ended in nineteen seventy two, when in ninety seventy one when President.
Nixon put a complete end to it.
But they still have a lot of gold left over from that. Otherwise they wouldn't own unigold at all. Why, and some of that is held by the Treasury. It's unusual. It is very unusual for the treasury to hold gold as opposed to the central bank to hold gold.
US Treasury, Yeah, the US Treasury, Yeah, But why is that? Why is it unusual?
Well, usually it would be a central bank function to do that. The Treasury's responsibility is to raise money for the government, and that to help the government to spend the money and not to stabilize the currency. But there's been periods of time in the US where the US dollar was pegged to gold, but there was no central bank, you know, the FED only came into existence in nineteen thirty eight, and so the Treasury was responsible for managing the pegging of gold to the US dollar before the
FED even came into existence. So it's a strange historical artifact. You got plenty of them in the US.
And just one lasting for the every day listener who's not a cross how it all works, Sake, What do you mean by central banks need gold to stabilize their currencies? What does that meaning is it? Why did they do that? And does it give us assurance that gold really is a stabilizer for our own portfolios?
Yeah, they look, they probably don't need it, James. Nowadays they have much more sophisticated instruments. They have swap lines with the FED. So in a crisis like COVID, the FED and the RBA open up a swap line, which says that the FED can borrow Ossie dollars from the RBA, and the RBA, more importantly, can borrow US dollars from the FED, and that bilateral ability to borrow each other's currency at a fixed rate is referred to as a swap line. And that's a much more. But swaps are
a very modern thing, right. They only came into existence in the nineteen eighties and nineteen nineties and so look, with the modern instruments that reserve banks have, they really don't need gold. But it goes on and that's the reason why I was there in the first place.
Terrific to talk to you, Sam, Doctor Sam Wiley, Windlestone Education Group in Melbourne Business School. Great have you on the show, Sam, and I love the week we chose to have you. I mean that was a bit of luck. So we got you today. Thanks a lot for coming on.
Thanks, James really enjoyed it.
That was doctor Sam Wiley. Okay, folks, now obviously keep your eyes wide open in the days ahead. As I say, it's an extraordinary period, highly volatile and highly volatile by the way. It means share markets fly up and down. Okay, so they flew up this week, they flew down this week. Let's see what happens next. Keep those emails rolling the money puzzle at the Australian dot com dot a you. Today's show was produced by Leah Samaglue.