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

Well, I'm straight to a Chris could have like mate. It's good to be here buddy. What a weird time it is Is this is this structural change? Are we seeing structural change? Yeah, you bet like high for longer rates high inflation the battle between Communities and politicians you know profit get spending and Vailors yeah, we're seeing you know huge increases in insolvencies And that's the beginning like huge we 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 18% annual rate right now Our forecasts can't we have the peak to trough for when Sydney prices? At 17% but here's the rubble mate as you would know that's the 5 million person city average within the city on our numbers Individual suburbs will fall as much as 20 to 40% National house prices are currently falling at about a 16% annual rate We're expecting the national peak to trough for to be about 13% will break the record for the biggest it for ever in house prices Our numbers before Christmas. So Sydney's falling at 18% per annum Melbourne a bit less than that but double digit all around the country and and then at the same time Suddenly 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 2002 and and here too and here high level since 2011 and there's real parallels to the tech boom, mate And not not many people talking about this you don't make that boom in the 90s late 90s late 90s Yeah, and you got to remember again people forget this the US share market fell 49% in 2000 and the Nasdaq fell wait for it 28% right and then they had a recession so basically we're having the mother of all cap experiments right now globally But in the late 90s. We had a similar boom investing in the internet and it's fascinating 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 we think this is episode number for us six or maybe close to and I said that the you know US will be raising rates Australia will be raising rates at 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 1.25 percentage points That's our official number my personal number is more like 150 to 200 basis points So that started hiking in September in the tech boom they hike by 180 basis points and the US 10 year government bond yield Which is like the price of money so every borrowing rate in the world prices of that number it started in the tech boom at 4% And it went up to six and a half to 7% now in this recent cycle the 250 250 points. Yeah, and in this cycle We started also at about 4% in the US about 3.9 and right now we're at 5.3 and It looks like you know, there's a risk of 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 You had a lot of inflation and the fed started lifting rates And specifically the fed raise rates By 180 basis points. So they lifted rates from 4.75 to 5% they have a range to About 6.5% so there was a 180 basis point increase in rates that's roughly what we expect for the fed I mean one numbers 125 my numbers 150 to 200 And then you saw a parallel increase in that 10 year government bond yield as I mentioned from 4 to 6 and after 7 What happened when they raised those rates it's basically like a tick boom So it's it's just like a Python is fixating the economy and it's what we're seeing right now So think about what happens when we raise rates here has prices go down businesses go bust People get really fearful they stop spending money Activity grinds to hold you know this better than me, but I've spoken to Too big resi developers during the week and they've said Sal's aren't down mate. Sal's have Freaking stopped. They don't exist. They don't exist. There's no sales And so the in the tech boom in the late 1990s and 2000s eventually that Discount rate or hurdle rate or the Government bond you'll get so high and because all boring rates are set off that level so they're above that That it just crushes everything and it basically the boom canal cannibalizes itself and I have a feeling That's what we might see here in this cycle And they had a recession equities fell 50% Text text docs felt 80% on the nose ache and potentially we're gonna you know still in the barrel of something similar in a cycle. Is it over Resuberance So what causes this but I don't remember the tech boom that in the late 90s early 2000 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 etc. Not only here but every Ross And we are seeing some big stories come out more recently. I know I see Joe put up a story about a firmist today and That that that that's been pulled. I'm not saying it's a disaster. It's just been pulled Because of appetite Are we now facing off the over exuberance of last two years? I think that this cycle is Really legit in terms of AI is revolutionary. I need to know what's to yeah, that's true and So so I think on the one hand. Yes The extrapolation of earnings and profits from these unprecedented innovations is inherently Very difficult nonsense. So basically there's a lot of bullshit But what I will say is this That we are seeing huge productivity growth in the US. We are seeing 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 10 men Unemployments come down inflation has gone up and what's novel mates that we've never seen before Is for the first time more or less in our lifetimes in 40 years. You might be a touch older than that We're seeing technology as a driver of inflation And this is one of our hypotheses. We argued that AI would be inflationary not deflationary and that AI would create jobs not destroy jobs And it's amazing when you look at the US inflation data So basically for the last 40 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 get every year more processing power more storage, you know more for the thousand dollars and that gave us Over 90's and 2000's 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 realize that in January 1990 the IBA cash rate was like 18% Right and the reason it came down from 80% all the way down to 0.1% in November 2020 is partly because of the miracle of Technology deflation in the last 12 months for the first time in almost half a century tech prices are gone through the roof Technology is now a major driver of inflation 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 the world has thought money was cheap like super cheap So you got to remember the US 10 year government bond you're in 2020 was 0.5% here in Australia 0.6% We're those fucking bullies. So those are interest rates. They were like we're halloween. Yeah, halloween We're going to make our like band is because we can borrow as much money as we want for free and we could build the ambient We can build the NDIS happy days. So they racked up massive amounts of debt and The public spending has driven a lot of inflation on top of the AI cap expert driving up tech prices So all around the world we'd see these monstrous budget deficits So I think since our bow came to government Aussie government debt has increased by about 660 billion gross The the next influence is particularly in Australia migration So massive amounts migration dropping half a million people on the East Coast every year. It just puts pressure on prices Another influence in Australia on inflation has been This wanky word productivity, which I hate but basically means we've lost our mojo and we're not working particularly hard The lucky countries become the lazy land, but really what it's about is the The kind of the CFMU writ large Dynamic that is emerging camera, which is basically tax and take from those at generate Has dealt the incentives for entrepreneurs create things so they're taxing everyone to the bejesus and they are really reducing the motivation to build new businesses hiring people to innovate and to be entrepreneurial in the private economy and instead people are the Leading Australia like myself or They're in working for the public service. So the size of the bureaucracies in expanded 25% 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 deglobalization and that basically means we're taking our factories out of China where rebuilding them locally around the world So the supply chains are coming home and that's inflation apart one part two you've got global Remilitarization everyone on the water is being a shit-ton more on defense and That defense spending is massively inflationary and then the final dynamic is you've got these huge supply side shocks Russia Ukraine Iran increasing the price of gas fertilizer petrol diesel and so we just live in this inflationary world so to answer your original question question, is it exuberance? Yes, there's unambiguous, like PE multiples. Let me put it this way. The one line adds to that question is simply this. The cyclically adjusted price learning multiple, which is a valuation measure for US stocks, is at the highest level in 200 years, and there's only one time in history where it has been higher at the peak of the tick boom. So we're at 41 times, the tick boom was 44 times. So, you know, the downside is significant. It's very interesting in the way you put it, because Jim Charm is our treasurer, has been continually blaming the Middle East. What are some 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 are some like you think about that narrative? I mean, all of our inflation, most of it, like the line share rate is driven by the professional politicians. It's the fact that they're racked up $660 billion of debt and spending since 2022, aligned across federal and state governments. The fact that we started in 2007, we only owed $100 billion. Australians, while our federal and state government authorities owed the world $100 billion. By 2030, it'll be $2 trillion. Our annual interest rate, state debt, state and federal. But here's the rub. Our annual interest bill, mate, has 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 of $110 billion a year in interest. That's 10% of our current federal debt. 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 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. So, but what would you say? What would you say? How do we solve this? Like, you know, it's an easy question I ask. I want to answer. But like, how do we solve it? And apart from changing government, if you, if you were Jim Charms today, what would you, what would be one thing you would look at? I actually think it's pretty easy to solve. I mean, there's quite a few things you could do. If I was prime minister, you were treasurer. How would we solve it? It's the same thing. Just putting it out there. Oh, man, that would be fun. I remember Malcolm Turnbull. Love NBC. Once I said to you, he said exactly the same thing. He said, 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 labor, a shortage of workers. Well, if you take a quarter of Canberra, right, professional, political and public class and redeploy them to all the other, I mean, we got more than enough labor. So that part one, and you'd save an enormous amount of money. That's interesting. Part two is I would zero migration, or at least zero. I would reduce 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 Alpenese. We just can't cope with those population pressures. And that's what's putting a lot of Canada model. Yeah. And we've seen something in the U.S., they've killed migration and New Zealand killed migration and the Canadians have done it. It's no surprise that U.S. has gone fantastic. Leak fantastic. With zero migration? Yeah. And the next thing I would do is sell the national broadband network. So I'm not sure exactly what you get for probably 20 to 30 billion, best case scenario. But I've plugged that off. I'd cut the NDIS down by 75%. Right size it to, you know, 25 odd billion a year, or whatever, you know, that number ultimately proves to be. So you massively reduce government spending. What about our debt? I come to the debt on taxes. I would basically unwind all of the recent budget measures, but I'd reduce income taxes. I reduce corporate taxes. I would normalize the capital gains tax back to where it was previously, which is more or less in line with every other country in the world. Boost the consumption tax at GST from 10 to 15%. And with debt, 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 police that came up with an idea decades ago, which was, oh, we're entitled to these retirement incomes as politicians and public servants. Maybe we won't get paid. What do you mean by that? Retirement incomes, the politicians. Supernovation. Yeah. So basically, we're entitled to our version of supernovation in retirement. And there's no pot of money guaranteeing it. So the police 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 police. This is our money. You're in my money being set aside just for the public service and police. 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, then it's a future fund. And if you take its return target is got about $60 billion too much of our savings squared away in that fund for police. So in other words, as politicians retire over the next eight, so many years, there was $60 billion more in there than we currently need assuming certain earnings for the future. Assuming that it hits its return target now, that's 7% a year. It's actually delivered 9% a year on that basis, the $60 billion jumps to 110 billion. So the more 110 billion of Australians cash set aside for police in the public service that shouldn't be there, right? That's based on the realized 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 before that's been taken out of the future fund. No, no, that's been allocated to the future fund. So there's another 60 to 70 billion of pork barreling where basically they said, we want to help out housing. So he'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 run a check at any point in time to all those special interest groups. If it warrants it, we don't need to square away cash. Well, it doesn't need to be there forever. Yeah. And check out this. Of the 66 billion, 30 billion is actually sitting in cash deposits earning about 4%. Whereas the government's paying interest on the debt that exists right now of five and a half percent. So we're losing money on that money. And it doesn't need to be so they're called negative carry. If you did that in your business, one of your funds, they'd be talking about it forever. Yeah. So so the simple idea is to say, let's take the 60 100 billion from the future fund that doesn't need to be there. The polys and public services have further than this 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 of billion. And then there's another 60 billion of special interest rates. 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. So you save 8 billion a year, you reduce the government debt by circa 12% or about 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 their idea. We're carrying 150 billion of excess cash, which is actually tax pay is harder than savings. And they'd be much better. So just by paying back the debt, cutting the annual interest bill by 8 billion a year, and moving on. So that's what I would do. So Chris, usually, is that the government, parliamentarians, have a squirrel reside, billions, hundreds of billions of dollars, just to make sure that when they retire, they get their pension, whatever they, however they get paid on retirement, just to make sure that there's enough money there to pay them. Yeah, it's from tax. It's from our tax, our earnings, our labor 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 or 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 thing 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. They get a percentage. Yeah. Well, they get a fee. And then the top guys are making millions of dollars a year. And there's 500 people working at the future fund. And then the Senate left governments want to set up all these special interest funds for medical science, housing, aboriginals, disasters, affordable housing we talk about. They had droughts, whatever the case may be. But the government can write those checks at any point in time. But you don't need dedicated funds. And by the way, the 66 billion 30s in cash is not being used. And it's in cash running lower rates than the borrowing rate. right 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 two 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, much risk, much less risk, you 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 on these high interest rates. So that's an absolute freaking no-brainer. So just look at the, I love the idea of paying less tax here in Australia by the corporate tax or personal tax. What about the argument that says that, well, first argument 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 break even, or alternatively we just can't, we haven't got enough money, we haven't got enough, we've not 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. Well, I can disappear the budget deficit overnight. The NTIS is basically the budget deficit. You know, we're spending, you know, 50 to 60 billion a year on the NTIS, and Australia's budget deficit is about 60 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, with 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, you know, lucky countries become, you know, a bunch of losers basically. 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 learn 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. These guys are basically shipping in people to buy votes. And do you think that's not too dissimilar to what's happening with lots of parts, a lot of parts of Western Europe? The same sort of, and what was under on Biden, Canada? Biden did it. Trudeau did it in Canada. Biden did in the US. I don't did it in New Zealand. Starmer's done in the UK. It's a purely political program. So, yeah. Maybe you can expand that a little bit though. Well, they think there's a high correlation between, you know, shipping in some folks from the Middle East that will be, you know, filled forever indebted to the Labor government for giving them permanent residency before vote. And vote, yeah. So, I mean Australia is an immigrant country. 30% of us weren't born here, as you know. And that's been our secret source. But it needs to be managed in a very orderly way where people are brought to this country on their merits, where their value were creative 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. Is it pretty simple from your point of view, probably not generally speaking, but is it pretty simple from Chris Joyce point of view, that really the best countries, the best country to have is one that is economically viable for all the other stuff or 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. 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, 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 25 to 50 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 end so many, I mean, the interesting thing is if we had cathartic 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, Paul Enhancin's chief of staff reach out to me and I actually met with them both during the week, I was really surprised. Well, with what? Well, I was expecting Paul Enhancin 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 ahead. 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 blingers up, you know, peer 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 within perfect information under duress. So I have no idea what Paul Enhancin's like, but I'll tell you this, chief of staff is 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 formally the general counselor, Scott Morrison, ex top notch M&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 what's happening and what it means for Australia. You kind of, you can see when people get the glazed eye lock and there is nodding and they don't really understand where 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. I wasn't even expecting to have a conversation, but we did. If we just get their solutions and they will make a lot of sense to me, and I think a lot of people would agree with that, but like we've got to have people with a right amount of intent and preparing us to actually take the forward and maybe just pulling, maybe it's going to be turning out to be his new crew, you know, Angus Tyler, etc. Maybe, but it could be me one day, it could be you and me one day. And I know, actually, if I do it, would you do with me? I don't think so, but I'm just not for me, but I think you'd be amazing. Yeah, that would be fun. I'm more than happy to offer my views to anyone, including obviously you, it's my mate, but you'd be amazing, mate. It would be fun. Do you think my brothers should get a run? Yeah, your brother would be a beast. Your brother's an absolute weapon. Yeah, totally. So, but if I go back and let's say nothing happens, mate. Let's say there's no change. There won't be any changes in 2020 anyway. As I said recently, I mean, 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. It was not in all those every three years with the government and we get to vote once. So there's not going to be a change on until 2028. What is your prognosis between here and between here and then assuming the assuming it's just it just stays the way it is because they're not going to change anything. No, it's going to be an absolute disaster. We're going to recession. We're having the mother of all housing corrections. Why is that a problem? 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 pretern actually can't help themselves but spend money to buy votes aren't going to stop. That's the 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 can't under the weight of government. Regulation is insane. When I come back to Australia, like I've been through 70 cities in the last eight months, 14 countries around the world, yeah, four continents. When you get to Australia, what you immediately are struck by is world class amenities. Amazing country, like cities best country in the best beautiful 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, there aren't five 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 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 US is not the perfect panacea, but it's coming out to Australia. We're going to see crazy spending, which will continue by government, which will continue to drive inflation. We're going to see ongoing high levels of population growth and migration until this debate ends up crushing that, which will happen. They'll grow inflation. Yeah, they'll grow inflation. We're going to see the RBA having to reluctantly match rates higher, which will create more more problems in parts of the economy. Australia is actually getting a lot of capital investment from the AI boom. So that's actually powering a part of the economy. The US economy into a lesser extent Australia looked a little bit like the mining boom pre the GFC. In the mining boom 15% of the economy, the economy in Australia was going gangbusters. The other 85% was more or less in recession, but the mining boom carried forward. The mining boom carried the overall exactly right aggregate economy and the RBA responded to that by lifting rates up to 7.25% even through the early stages of the GFC. Anyway, at some point what happens is the country understands we're going to pull back on the immigration that happens. So you lose all the demand in the income shocks that that brings with it. The politicians get place in the communities cross years because I think what now has happened is there's been a galvanizing moment post budget where the man on the street said, gee whiz, I was loving making out like a bandit from the NDIS and the NBN and all the handouts and all the welfare. That was all really, really good. But I don't really kind of fancy being asked by this cost of living crisis. This inflation is destroying my real income. So I'm really feeling the cost of living one too. I'm also getting asked by these really high rates. Australia actually has today amongst the highest interest rates in the world. And then I thought my business was okay, but I've just been with a 30% tax on my family trust, which I organise my business around. And I've now been hit by the world's highest effective capital gains tax rate on the property that was potentially securing the mortgage that I use to fund my small business. And on top of that, they're whacking me by with the effective and like the ban on negative gearing on our numbers is equivalent to an interest rate increase of about 200 to 270 basis points. Like I don't know. No, yeah. Yeah, in terms of reduction. Yeah, yeah, the net purchasing and the net position here. 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 RBI. I've been told by Joy Boy and Boris that you get to get another two hikes or the RBI cash, the boy market saying the RBI cash. Anyway, see everyone say it's now get it. It's these fucking politicians spending like drunken sailors just taking from all of us the community and all of that to line their own pockets and build these empires and these institutions. It's an oligarchy. But in Canberra is an oligarchy, right? 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 high value targets, a zero sum game, take from the private sector in order to power the public sector. And if I take all of that in those things you just talked about then, add them all up, we are definitely going to go and fall into a hole. Yeah, because the public's so effectively what once the community acts like the Biden constraint. So really the Biden 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 is 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 one's pairing. And then the immigration gets restrained, which also undermines demand. At the same time, you've got these kind of crushingly high rates and, you know, these precipitous plungers in property prices amplified at the margin by another dynamic, which is, there's been a huge surge in non bank lending in Australia. As part of this, right? You run a normal non bank lender, you're a big road, but there's also been, you know, these private credit phones that have extended loans to riskier borrowers who couldn't get a loan from a bank, which we're seeing a lot of this fall apart at the moment. Fall apart. Like I heard this week, that all the borrowers to small scale commercial property. I mean, there's mass liquidations. We're seeing as we, I think, already discussed huge increases in insolvencies. And we're seeing 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 going to see what we used to talk about in past cycles, which was credit rationing. We're basically bank stopped lending. We saw this in 1991. And the private credit market has become such a big part of the property finance game. That's why you see all these residue developers blow up because they can't get finance. And there's no sales. So the finance is not going to give them money because there's no sales. The financiers have got defaults and delinquencies. So the guys backing them are not going to be supplying cash. They're net net exiting the sector. So you get this negative feedback loop. So Australia's 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 needed to take the 25% of the bureaucracy that should not be working on the public purse. They need to become tradis, doctors, nurses and do something productive for private society. But in relation to the recession we had to have, which is, you know, Keating's famous words in 1990, whenever it was early 90s, in relation to that, when you say we had a recession, but most pandas made a lot of business don't really know what that means. I mean, how does it affect me? A lot of people don't say, well, say, well, okay, two negative quarters or five negative quarters, whoever it is in a row, or the negative growth of GDP. What does that mean for me? Maybe we should sort of explain to them what happened to unemployment during that period. Well, this is a really important point. So the economists like to talk about recessions, meaning negative GDP growth, but another measure of recessions is just simply a significant increase in unemployment. So I think what's going to happen is our unemployment rate was in the high 3% vicinity. That was, you know, historically close to all time lows. The RBA's staff told the RBA board that a normal rate of unemployment is 5%, the RBA board and the governor and Debbie Governor thought they were two smart behalf and they rejected the staff. And an experiment, by the way. They ran this experiment with a macular disordered population and the so-called narrow path. And they got their June 21, a June last year. Yeah, that's right. For a moment. Well, well, not exactly two point six and whatever, like one quarter of semi-soft inflation. Yeah, yeah, but they RBA board and the RBA governor, Debney Governor said, we're not going to listen to our right analysts. We think the right level of unemployment is not 5%, we think it could be low force. 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 want to preserve the post pandemic employment grants, but those gains were never real. They had to go. They've now capitulated. They've been, yeah, they've totally swung 180 degrees. So the RBA 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 5%. But really, it's probably, but that's the normal. That's normal. Now it's at 4.6 County. But it probably needs to go to five to six. And we, as you know, because we're a bit older than most, haven't had a proper recession since the only one where the unemployment rate hit almost 11%. And yeah, so I think we'll see a recession means a big increase in unemployment. A lot of businesses are going to go bust. A lot of people don't lose their jobs. I think it's going to be very tough. Anyone on the public service, they're going to need to retrain rescue, which is not a bad thing. I mean, the public services chocolate block full of super smart folks, but the idea of the lollipop boy or lollipop girl earning 250 grand a year holding a stop sign and construction. So I mean, you can't find workers because all the the guys and girls want to become Aussie lollipop guys and girls in my window. Yeah, exactly funny story. In Christchurch, they built us a stadium and a new stadium for the Crusaders rugby team. I sponsor them. And the architects were Australian, and they were shocked. And they they were in this meeting one day and with the 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. Whereas in his own, they put raincoats on. So I think that's kind of a little tell in terms of the Australian productivity problem that we have. But yeah, I think it's going to be tough and there'll be adversity in the house. There's not going to be worth as much as it was and you're super, probably not going to be worth as much as you thought it was going to be worth and you're going to have to work a little longer. Maybe won't retire when you thought you were going to retire. It's going to be tough. But the choice of people is interesting, mate, because in the US, they've got some people right, but they've got some people demonstrable wrong. Like this Scott Besson character. You've seen what happened with him in the so basically this is this dude that Trump put in power as the US Treasury Secretary, which is like head of the Treasury industry, but incredibly powerful position. And his next hedge fund manager, he worked for George Soros, the famous dude who managed to pull the British pound out of something called the European exchange rate mechanism in the early 1990s and made a billion pounds on that trade. Anyway, Soros is a hard left guy. Yeah. And this dude Scott Besson, who's I believe gay, which is great, worked for Soros as a junior burger and then tried to sell his own hedge fund blew up, shut it down. Went back to Soros, worked there for a while, tried to sell his own hedge fund again, blew up, shut it down. And then somehow ends up being Treasury Secretary. And he came out and this has been pretty astonishing stuff for financial markets. He came out and basically said, I think the US 30-year interest rate is too high. So I'm going to try and manipulate it lower. And at the time, the US 30-year government bond yield was 5.25%. And it had risen by about 70 basis points. And the problem in the US for Trump and Besson is the home loan rate in the US is a 30-year fixed rate. It's not like Australia. We have variable rates. And the US 30-year mortgage rate had jumped from 6 to 6.7%. And Besson said enough is enough. And this is a good example of people in positions of power having total brand explosions. He said enough is enough. I'm going to bully it lower. I'm going to take on the bond market. And if there's one market you probably don't want to take on, it's the bond market. And he gave this famous interview. This is like weeks ago, months ago maybe, but recently. We're this guy said so So kind of how's life he goes? Oh, I'm loving it. I've got edge I've got asymmetric information. He's talking like a trade-up, but he's a treasury secretary and the guy got the journal Says will you remember this and he says well? I know exactly what the Japanese are gonna 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 blow up in his face And he said don't you think I know more about what Japanese policy makers 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 Treasury and then he said I Am the house. Well, and 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 over a particular period and He said I'm gonna 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 5.25% down It actually rose it jumped. It's now up at like 5.6 5.7%. 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 But I think him front-running personally through his family office a lot of the announcements So all this inside of trading around Trump is really unseemingly and similarly the choice of people that you put into power in the case I gave the lesson. Yeah, he's is pro family important. That's why the country would do well having I think you You know pulling some of these rains mate because Yeah, I don't think you'd let this stuff flop flop in your face in the same way. Well, I've got plenty of good advisors Sitting around me to tell me not to it just on that good. Let's just talk about midterms What effect do you think the midterms are going to have globally and or let for a start that what do you think is going to happen in the midterms But that probably not going to be an issue in the Senate and in any event Maybe something in the in the lower house Congress, what do you think is going to happen? I've absolutely no idea what's going to happen in the midterms all I know What about if we give me a yeah, so what I what I know is that the US economy is really benefiting from the focus on profit maximizing Research and development innovation. I mean the tech sectors on fire the AI sectors on fire businesses of fire A adoptions on fire make US benefit manufacturing is just Absolutely booming massive revolution in in US manufacturing now that they can digitize everything 3d printing robotics. They don't have the problem of having a high Labor cost base they compete with anyone they can compete with them. Oh look at Elon With you know monopolies in rocketry low earth orbital satellites. He obviously kicked off the whole Electric car revolution. He's about to kick off the robotics revolution. Thank you phones. Yeah, it's it's incredible If we don't get a second Republican administration if we don't have a Republican succeed Trump. I think that will be diabolical for the US economy and if we have anyone like Gavin Newsom The Californian governor Provile and 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 Texas and Florida are booming they're both running budget surpluses Businesses and people are moving to those states. There's a net Sort of departure of people from and businesses from California and New York So I worry about the ramifications of the midterms for Trump's ability To put in place his program one thing interestingly about Trump That there 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 he's predecessor pal Trump had this monumental clash with and and Trump more or less Dustin him up and Trump's been relentlessly calling for lower rates Walsh raise rates, but interestingly when he raised rates Trump didn't excoriate him He actually came out on the day and said I told him to raise rates because he's got dovish board their full of Democrats And he just has to fall into line. I think Trump is doing a Reagan Redux Reagan in the 80s unleashed Volca who was running the Fed and they got double digit rates that eventually crushed inflation 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 higher 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 pretty ferocious hiking cycle from the Fed and he'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 0% to 5 and a half odd percent Down to 3.6 percent as they're hiking and here in Australia we went to 0.1% November 2020 We went we started lifting rates in May 22 At 0.1 we went all the way to 4.35 and November 23 sat there till February 25 then they cut three times that triggered a house price boom and got labor elected And now they're reversing others cuts and trying to get rampant inflation on the control But now these central banks are chasened the message for listeners is they're gonna go back to being what we call hard money men and hard money men Lays are like focused on crushing inflation with high interest rates More or less buggering 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 Responsibility of the professional politicians or Friedman said that many times consumers never create inflation Yeah, I must do as late we don't I mean like we we consumers we don't it if if We were doing the same analysis in Australia between A choice between unemployment across the living. Do you think there's any research on that that you've heard about The similar to what you're talking about in the U.S. Well, I think yeah, it's a really interesting question. I think that People today are really Wealthing and the way to the high cost of living And the high interest rates which are responding to the high cost living Yeah, at the same time unemployment still very low at 4.6 percent. So I'm not sure people back themselves to get a job Well, I think for you know 90% 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 Uh, this Goldilocks bullshit of being able to crush inflation without really lifting interest rates sufficiently high without having an impact on unemployment and without seniority accommodation has been repudiated And they're now in the demand destruction game which basically means Killgrowth raise unemployment to credibility capacity Uh, and encourage capital and the best you need to move money and people away from bad businesses To good businesses. So let's take firmness. I have no idea of firmness, 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 the reason doesn't have a reason to exist Uh, we would want those people in 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 uh, burning through all this cash this 60 billion a year and Canberra is Canberra's been the single's biggest driver of employment and growth since the pandemic 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 You know, wind down their hobby horses the NBN the NDIS because it's all you know jobs for the mates They're all on these boards and committees and they're all learning hundreds of thousands when they want to retire when they want to live Canberra They get a job Greg Combae is right. The future fun. Yeah typey days We can just just uh if I could quickly ask you about that something in relation Cassetta did you know both sides of politics. Yeah, but happens. Yeah, you know, you're not sort of jumping all over labor In particular, but it happens across the board because still it became the Chairman of the future final manager director what it was of the future fund for a long long time, but just on the unemployment thing um Do you think that the Reserve Bank Governor and everybody else who made the decisions will be prepared to go against the so-called thesis thesis that was introduced in 2024 by the treasurer as a result of the so-called independent um inquiry into the Reserve Bank Or review of the Reserve Bank um whereby he's now given them Given unemployment or full employment equal sort of gears toward as he has given to inflation because that's a big thing Will they and he's gone appointed a new board? Yeah, he's really charmer's doing and that's the other thing I see there's charmers doing 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 made a mistake you need to go to five our modeling which was We were using the RBA's modeling the RBA's internal staff modeling all suggest you should be at five They said no, no, no, no, we're just not by half. We know better. Two boys wrong The staff are wrong. We're gonna keep it at 4.35. We're gonna thread the need. We're gonna have this so-called narrow path They talked about where everything would be in a process 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 and it was you know perfect time to lend some support to the federal election in May 2025. So yeah, you're right. Charmers basically sack the governor and deputy governor, appoint his own personal proxies, has appointed most of the voters on the interest rate committee, and de facto has exercised huge influence over that organization. I've said it before, I've got no problems with that. Most people in his position were doing exactly the same thing, but we have had a whipped RBA as a consequence that's pretty naturally doubished. I'll tell you something that's absolutely ridiculous. You've got this massive rampant inflation. Six month annualized inflation in Australia is 3.9%. They target two and a half, 12 months it's 3.6. I think the three month annualized rate is 4.7%. But basically we have the highest, amongst the highest rate of inflation in the 12th world. So you've got a big problem, and you just cut right three times, and you've got it horribly wrong, and the RBA consistently made poor decisions, and the rest of the world think that. So if anything you want to be is hawkish as heck, get out there, scare the purchases out of everyone and say, "Okay, we're going to raise rates, we're going to get onto the wall path, 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 jaw-biting, where the message was, "This is going to be a long campaign," and unless you capitulate, and unless you can depress these consumer price pressures, it's going to be pain and misery for everyone. Every single time she's lifted rates, there's been this mixed messaging, which is I think her cow-towing to Canberra, and cow-towing to anything. Well, not wanting to upset them. I think I'm not wanting you to get political. Yeah, because she'd be trying. But by not being independent. She is being politically. I guess you're going to say, "You can't sit on the fence. You have to be striding about this sort of stuff." I'm the independent reserve bank governor, and I've got to do my job. My job was to fix inflation. But what 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. Exactly right. He changed the RBA's mandate to put much greater weight on full employment, which no one knows what it means, but anyway. Which basically means keeping unemployment really low. That then forced the RBA to run this experiment of cheap money and artificially low unemployment, which gave us artificially high inflation. So I don't blame her. I think she's just done what she's, because he said, "There's your mandate." He'd go for it like unemployment was important before, but now 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 resort bank board decision was unanimous, which is quite interesting. Maybe they're starting to get a bit nervous. What is going to happen November? I think in November. The November meeting. Yeah, I think in November they hike. I think they hike it once more this year. I'm not sure if they have two hikes in them. I think they're going to be skid 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 has been very sensitive to house price movements, but they're not supposed to be. 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 about 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 is starting to drop and you're seeing these rate hikes propagate through the economy, through liquidations, through insolvencies, through 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 made 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, mate, the sobering canary in the coal mine is freaking New Zealand. So the New Zealanders, the toughest mustard right and their central bank, after the pandemic lifted rates to five and a half percent, they put the freaking 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 F and deal. And guess what? Inflation today is still above the RBNZ target. Now they cut rates from five and a half percent down to two and a quarter. So these big rate cuts thinking it was all one and done. And they put the genie, the inflation genie back in the bottle. But now they're standing down the barrel of core inflation that's at two and a half percent. They target two, which is a reasonably big mis for a central bank. Now remember, we target two and a half percent and right now we're running at four. But this is a 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. 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 ride. And he said Chris, I think the Fed's going to have to go to seven percent. Whoa. And it's going to have to lift rates in line with what we call nominal GDP. And that's his nominal GDP is real GDP plus inflation. Now real GDP in the US is about three and a half. Inflation was until they started filling with numbers in the last week because they load all the inflation numbers in the US by filling with them. Inflation was three and a half. So he was saying seven. The Fed cash rate in the tech boom in the late 1990s, 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. And what that means is global recession. US kind of goes in 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 benefits from rate hikes. So floating rate assets, maximum liquidity. You want to avoid liquid assets like the plague. And you're one of 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. No, no, I understand that. But like, and by the way, I think the point 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 way you do this is cash based assets. Yeah, I think so. And high grade cash like assets that are floating rate that are liquid. Liquid being you can get your money back. Yeah, really quickly. And think about equities. Like we know their P multiples are on a cyclically adjusted basis at like 200 years. We know what happened last cycle in the tech boom. Yeah, and equities 1250 and 80. We know what's happening to house prices right now. I will say talk about commercial property in a second. So Aussie house prices in line for record falls by Christmas. Sydney prices will be off by 17%. So why wouldn't Aussie equities 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 in their 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 triple A rated Aussie government bond. And they said, yeah, it's a pretty skinny margin. Well, when you look at the RBA's research on what extra return should A grade office property give you over risk free triple A rated government bonds. Historically, it's been about three to five percent. So an A grade office, it has normally paid you three to five percent above the lowest risk. Yeah, the risk free rate, the 10 year government on your. 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. Either you get your tennis pay more rent. One of the others. The first segment is not going to happen. Yeah, that's right. So, you know, it looks grim for commercial property as well, mate. Really, really grim. Yeah, I don't like it. Let me add to one other final thing. This is 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 to solve it overnight. You have no housing shortage, buddy. You solve it overnight. The housing shortage is all predicated on these projections for super strong population growth and it vaporizes the housing shortage, right? So, all these rezy spriggers that constantly talk about the structural housing shortage. You know, as you know, I advise, promise it's on how to see it in 2003. And it's funny thing to think about, like, for every day we've heard about these housing shortages, but if you have a state of execution like you just cut your population migration growth down to nothing, but the US have done it and have a problem. But maybe porn is looking good in that regard. Chris Choi, as usual, mate. Brilliant. Thanks very much. Awesome.