Latest / The Money Puzzle / Tariffs or no tariffs: Don't give up on Wall Street

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Tariffs or no tariffs: Don't give up on Wall Street · The Money Puzzle

• 0:09
  Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard everybody on what has got to
• 0:16
  Speaker 1: be one of the most interesting weeks, one of the
• 0:19
  Speaker 1: most interesting periods for investors and investment markets in a
• 0:25
  Speaker 1: long time, more intriguing, more perplexing. Occasionally I think more concerning,
• 0:31
  Speaker 1: believe it or not, than the COVID downturn. And that's
• 0:34
  Speaker 1: saying something. Now as we speak, we've had some relief,
• 0:37
  Speaker 1: right We've had the first a bounce on Wall Street
• 0:41
  Speaker 1: overnight ten percent, ten percent in a single session, basically
• 0:45
  Speaker 1: going in on Wall Street and the Australians share market
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  Speaker 1: will no doubt copycat that today and as always it
• 0:53
  Speaker 1: won't do as much. It'll do five or six percent
• 0:55
  Speaker 1: and then we then it's at that point we'll see
• 0:59
  Speaker 1: where we are well done on any of the investors
• 1:02
  Speaker 1: who went in early in the week, and we had
• 1:04
  Speaker 1: Jemma Dale on the show talking about how retail investors
• 1:07
  Speaker 1: as opposed to big investors were in the market buying
• 1:10
  Speaker 1: more than selling earlier in the week, so as a
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  Speaker 1: trade that was successful. The issue now is I think
• 1:17
  Speaker 1: we have to take a deeper dive because this is
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  Speaker 1: not over by any stretch of the imagination I expect.
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  Speaker 1: My guest today is doctor Sam Wiley of the Windlestone
• 1:28
  Speaker 1: Education Group, a principal fellow at Melbourne Business School, and
• 1:31
  Speaker 1: I think it's worth saying something of an eminent name
• 1:34
  Speaker 1: within investment markets who has lectured and mentored several of
• 1:40
  Speaker 1: the people who are regular guests on this show. I
• 1:43
  Speaker 1: found out after he was on the last time. How
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  Speaker 1: are you Sam?
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  Speaker 2: Very well, James, thanks for emboding me.
• 1:49
  Speaker 1: Great to have you so here.
• 1:51
  Speaker 2: We are.
• 1:51
  Speaker 1: It's quite a remarkable period. And all the discussion in
• 1:56
  Speaker 1: the last show, which you should listen to if you
• 1:58
  Speaker 1: get a chance, was about the nature of the drop
• 2:02
  Speaker 1: so far. That is, at the time markets were down
• 2:05
  Speaker 1: about ten percent on the ASX and fifteen percent on
• 2:08
  Speaker 1: the on Wall Street. But I suppose a million dollar
• 2:11
  Speaker 1: question is whether this is a convention to share market
• 2:18
  Speaker 1: drop or something different.
• 2:22
  Speaker 3: Well, it's quite different to some of the previous crises
• 2:26
  Speaker 3: we've had. So the dot com bubble that was a
• 2:29
  Speaker 3: genuine bubble, mostly in the Nasdaq stocks NAZDAK went up
• 2:32
  Speaker 3: from it from seven hundred and nineteen ninety six to
• 2:35
  Speaker 3: five thousand, where it peaked in March of two thousand.
• 2:39
  Speaker 3: That was a genuine bubble. Didn't go up as much
• 2:40
  Speaker 3: in the S and P five hundred, but the Nasdaq
• 2:42
  Speaker 3: stocks were people just got too excited. And then in
• 2:46
  Speaker 3: the GFC, that was a banking crisis, and banking crisis
• 2:50
  Speaker 3: are hard to reverse and that so that went on
• 2:52
  Speaker 3: for a long time. The dot com bubble passed pretty quickly.
• 2:54
  Speaker 3: GFC went on for a long time. COVID, of course,
• 2:57
  Speaker 3: was a global pandemic that no one saw coming, and
• 3:02
  Speaker 3: very dramatic action was taken by central banks and governments
• 3:05
  Speaker 3: which reversed the fall in the stock market and then
• 3:08
  Speaker 3: sent it a lot higher. And what we have at
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  Speaker 3: the moment is really a policy mistake, depending on your
• 3:14
  Speaker 3: point of view on this, but maybe I shouldn't characterize
• 3:16
  Speaker 3: it as a mistake, but it certainly the effects of
• 3:19
  Speaker 3: the policy of President Trump in introducing the tariffs and
• 3:23
  Speaker 3: the concerns that those tariffs will create stagflation, the inflation
• 3:27
  Speaker 3: plus slower growth. So they're really four very different types
• 3:32
  Speaker 3: of crises. No one of them is like the other ones,
• 3:34
  Speaker 3: and the effects and how long it takes to go
• 3:36
  Speaker 3: away are different. In those different crises.
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  Speaker 1: Is there any implication in what you're saying that in
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  Speaker 1: a way, it's become a sort of flashpoint of unknowns,
• 3:48
  Speaker 1: don't they. So there's this issue where people just don't know,
• 3:51
  Speaker 1: and so everyone reacts in a different way. The issue
• 3:55
  Speaker 1: for our investors, i'm sure, is whether it should change
• 4:00
  Speaker 1: the nature of their approach to markets, because in the
• 4:04
  Speaker 1: immediate history, right we've had some very good years. We've
• 4:07
  Speaker 1: had a string of double digit years on super fund returns,
• 4:11
  Speaker 1: for instance, and SMSF investors whom many of who listened
• 4:14
  Speaker 1: to the show, would have had some good years as well.
• 4:16
  Speaker 1: And in some ways it was a relatively easy ride,
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  Speaker 1: and I think there was a surprise perhaps how well
• 4:23
  Speaker 1: the markets came out of COVID, and then there was
• 4:25
  Speaker 1: a run up to the positive anticipation, positive anticipation that
• 4:29
  Speaker 1: Trump as a Republican president, would unleash all sorts of
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  Speaker 1: positives for the market, deregulation and tax cuts, et cetera.
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  Speaker 1: That's not the agenda right now, whatever is going on
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  Speaker 1: in terms of this sprinksmanship. As we talked this morning,
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  Speaker 1: there is absurd levels of tariff sitting in place between
• 4:45
  Speaker 1: the two most important economies in the world. So what's
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  Speaker 1: the Does this mean investors should change their disposition?
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  Speaker 3: Well, look, here's here's how I say it, James, is
• 4:59
  Speaker 3: that investors should be in the market for the long term.
• 5:02
  Speaker 3: I should get invested, get fully invested, and stay fully invested,
• 5:07
  Speaker 3: and not try to time the market. The ability to
• 5:09
  Speaker 3: time the market, which is as you know called beta,
• 5:13
  Speaker 3: is the ability to jump out of the market before
• 5:15
  Speaker 3: it goes down and into cash, and jump back from
• 5:17
  Speaker 3: cash into the market just before it goes up. Now,
• 5:21
  Speaker 3: a lot of people think they've got that ability. Hardly
• 5:23
  Speaker 3: anyone has, and that's been shown not just by academic
• 5:26
  Speaker 3: research but by the practical circumstances and experience over and over. Alpha,
• 5:31
  Speaker 3: which is the ability to choose between assets within an
• 5:35
  Speaker 3: asset class, like to choose between BHP and Rio, or
• 5:38
  Speaker 3: City Bank and Bank of America, or Tesla and Nvidia,
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  Speaker 3: choosing within the asset class of US shares or AUSI shares.
• 5:45
  Speaker 2: That's alpha.
• 5:46
  Speaker 3: There is a lot of alpha out there, and that's
• 5:48
  Speaker 3: the value that savvy investors can create. But jumping in
• 5:52
  Speaker 3: and out of the market is a great way to
• 5:54
  Speaker 3: do two bad things. One to be underinvested over long
• 5:57
  Speaker 3: periods of time, and two to realize capital gains early.
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  Speaker 3: So look, I think that the volatility in the market
• 6:04
  Speaker 3: which will go on from here, President Trump's agenda is
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  Speaker 3: very radical and he'll only be constrained ultimately by the
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  Speaker 3: Supreme Court and buy the markets and by nothing else.
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  Speaker 3: And he really does have a radical agenda, and it
• 6:18
  Speaker 3: didn't end last night, So everyone should buckle up. But
• 6:21
  Speaker 3: that volatility gives people an opportunity. People who are out
• 6:25
  Speaker 3: of the market, who are not fully invested, don't have
• 6:28
  Speaker 3: as much invested in US shares, especially as they'd like
• 6:32
  Speaker 3: to buy the dips to get ready for falls in
• 6:35
  Speaker 3: the market, have in their mind trigger points at which
• 6:39
  Speaker 3: they're going to buy in and then act on that.
• 6:42
  Speaker 3: And you're talking about retail investors doing an amount of
• 6:44
  Speaker 3: that recently, And so I think that's a good idea.
• 6:47
  Speaker 3: That's the way to think about the volatility. Be fully invested.
• 6:50
  Speaker 3: But if you're not fully invested, see the volatility as
• 6:53
  Speaker 3: an opportunity.
• 6:54
  Speaker 1: Can I throw a bare case? Can I throw the
• 6:58
  Speaker 1: warriors scenario at you, which is we mentioned to a
• 7:04
  Speaker 1: wait because a lot of our listeners are younger and
• 7:06
  Speaker 1: didn't endure the difficulty of that period where this market
• 7:11
  Speaker 1: felt by fifty percent, And as we mentioned on earlier
• 7:14
  Speaker 1: in the week, it wasn't that it felt by fifty percent,
• 7:16
  Speaker 1: but it was that it took a year and a
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  Speaker 1: half to do it, and it was even longer than
• 7:20
  Speaker 1: that before realized, before people realized it was finally over.
• 7:23
  Speaker 1: Now we can look at the news this morning and
• 7:26
  Speaker 1: it's all very well, there's a big bounce and all that,
• 7:29
  Speaker 1: and everyone is smiling that the market's gone up. But
• 7:33
  Speaker 1: only twenty four hours ago there was some very people
• 7:37
  Speaker 1: I would take very seriously, and they were deeply concerned
• 7:41
  Speaker 1: about one thing, which is this that bond prices were
• 7:45
  Speaker 1: falling at the same time as share prices were falling.
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  Speaker 1: And this is not supposed to happen, and it happens
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  Speaker 1: at times of extreme pressure on investment markets. And the
• 7:57
  Speaker 1: particular fear, the big fear this time round, is that
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  Speaker 1: should the rest of the world, particularly China, withdraw its
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  Speaker 1: de facto support for the US through the bond markets
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  Speaker 1: where there are this gigantic holder of US treasuries. Is
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  Speaker 1: that a fringe concern or is it a concern that
• 8:20
  Speaker 1: should be on the table.
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  Speaker 3: Well, in general, I would say if you take if
• 8:26
  Speaker 3: we zoom out and take the longest view of the
• 8:30
  Speaker 3: US market. I think that in ten or twenty years time,
• 8:34
  Speaker 3: we'll look back on this period and we'll see the
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  Speaker 3: volatility of President Trump's radical agenda and even to a
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  Speaker 3: certain extent, COVID as the COVID pandemic, as things that
• 8:46
  Speaker 3: were overlaid on something bigger. And that's something bigger is
• 8:51
  Speaker 3: AI and US tech dominance. And I think that's really
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  Speaker 3: the long term picture investors should be thinking. Investors should
• 8:59
  Speaker 3: be member. The biggest mistake that investors made in aggregate
• 9:02
  Speaker 3: in the twentieth century was to be underweight US equities,
• 9:07
  Speaker 3: and that was especially true of non US dollar investors.
• 9:11
  Speaker 3: You know that. I know you know this, James. But
• 9:14
  Speaker 3: in nineteen thirty a British pound was worth five dollars
• 9:19
  Speaker 3: and now a British pound is worth about a dollar
• 9:21
  Speaker 3: twenty So British investors, and this is true of Australian
• 9:25
  Speaker 3: investors as well, not only got the benefit of the
• 9:29
  Speaker 3: US markets doing so well, the US stock market doing
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  Speaker 3: so well in the twentieth century, but they got that
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  Speaker 3: fort four times uplift in the depreciation of the pound
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  Speaker 3: against the US dollar. And I think there's a danger
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  Speaker 3: that investors make the same mistake. The biggest mistake in
• 9:46
  Speaker 3: the twentieth century was to be underweight US shares, and
• 9:49
  Speaker 3: I think that's likely to be the biggest mistake in
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  Speaker 3: the twenty first century, because it's going to be about
• 9:54
  Speaker 3: tech and US tech dominance is accelerating and getting deeper,
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  Speaker 3: rather than the opper so zooming out and taking the
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  Speaker 3: longest view. This episode with President Trump, which will go
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  Speaker 3: on probably for the whole of his four years, will
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  Speaker 3: be overlaid on top of something that is deeper, more enduring,
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  Speaker 3: and more important, and that is to have exposure to
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  Speaker 3: US tech dominance in the twenty first century. And you
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  Speaker 3: saw an amount of that last night. The reason the
• 10:23
  Speaker 3: market bounced back so much, or a significant reason, is
• 10:26
  Speaker 3: that people don't want to be out of the market.
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  Speaker 3: They've been forced out of the market by just the
• 10:31
  Speaker 3: difficulty of President Trump's actions and the danger that if
• 10:36
  Speaker 3: he would not if he wouldn't take a backward step,
• 10:40
  Speaker 3: then the market would have to go down further. But
• 10:42
  Speaker 3: as soon as they had an opportunity to pour back
• 10:44
  Speaker 3: in the market, they were back in.
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  Speaker 1: You're not concerned that the US sort of imperial like
• 10:52
  Speaker 1: dominance of the markets and it's how it has ruled
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  Speaker 1: up from being whatever it was, fifty percent of the
• 11:00
  Speaker 1: global market to well over sixty percent of the global
• 11:03
  Speaker 1: market now. And it's complete domination of guilts or bond
• 11:07
  Speaker 1: markets as they are. You're not concerned that is on
• 11:11
  Speaker 1: the way, or that the technology pre eminence that drives
• 11:15
  Speaker 1: the entire US market is perhaps threatened by by deep
• 11:21
  Speaker 1: seek for instance in AI, by byd in car technology.
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  Speaker 3: Yeah, I'm not basically, But what on the lies US
• 11:32
  Speaker 3: tech dominance is the education system, you know, the fantastic
• 11:37
  Speaker 3: university system, It's Silicon Valley, and the ability to raise
• 11:42
  Speaker 3: huge amounts of capital for projects. It's the cultural inclination
• 11:48
  Speaker 3: to have a go and to not fear failure.
• 11:54
  Speaker 1: I mean, I have no problem what you're saying, and
• 11:56
  Speaker 1: I think it's worth mentioning to listeners that this is
• 11:58
  Speaker 1: not You are not just some in here from some distance.
• 12:01
  Speaker 1: You were at the top business school.
• 12:03
  Speaker 2: Weren't you at Dartmouth? Yep?
• 12:05
  Speaker 3: Dartmouth actually was from from nine at ninety seven to
• 12:08
  Speaker 3: two thousand and four.
• 12:10
  Speaker 1: I was at Dartmouth And was it that period that
• 12:12
  Speaker 1: formulated these views for you?
• 12:14
  Speaker 3: It was, and you know, traveling in the States a
• 12:17
  Speaker 3: lot at that time, and you know, going over to
• 12:19
  Speaker 3: California into Silicon Valley a lot, and even seeing the
• 12:23
  Speaker 3: US education system because you know, we had two young
• 12:27
  Speaker 3: children just starting primary school at that time and they
• 12:31
  Speaker 3: and just seeing the way that children are encouraged to
• 12:34
  Speaker 3: have a go and do not fear failure. It really
• 12:38
  Speaker 3: is quite a remarkable cultural thing. Not everything about US
• 12:42
  Speaker 3: culture is fabulous, by the way, but I'll tell you
• 12:45
  Speaker 3: working in the US is terrific. Like the confidence to
• 12:48
  Speaker 3: be able to take on complex things. Working there really
• 12:52
  Speaker 3: is the best thing.
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  Speaker 1: You weren't concerned that the move to tariff's was actually
• 12:56
  Speaker 1: a contradiction on that that it was protectionist, defeat retrograde
• 13:02
  Speaker 1: compared to the best aspects of the US that impressed
• 13:07
  Speaker 1: you overall.
• 13:08
  Speaker 3: I think it's foolish to introduce the tariffs and the
• 13:12
  Speaker 3: way that it's been enacted by President Trump, that the
• 13:16
  Speaker 3: backwards and forwards nature of it, and also the belligerent
• 13:19
  Speaker 3: nature of it, I think is maybe foolish is too
• 13:22
  Speaker 3: strong a word, but that's certainly not ideal, and the
• 13:28
  Speaker 3: we shouldn't think that there isn't a coherent strategy here.
• 13:32
  Speaker 3: I think the tariffs are really about these things. It's
• 13:35
  Speaker 3: about raising revenue so that the president can cut taxes.
• 13:39
  Speaker 3: It is about reassuring a US manufacturing and fulfilling a
• 13:43
  Speaker 3: promise to the Magabase. And especially it's about isolating and
• 13:49
  Speaker 3: constraining China. And look, we saw that overnight. So President
• 13:52
  Speaker 3: Trump said that the ten percent based tariffs are going
• 13:55
  Speaker 3: to remain, that the additional tariffs that were nounce on
• 13:58
  Speaker 3: the second of April are going to be suspended for
• 14:00
  Speaker 3: a period of time. But nothing changes with china one
• 14:03
  Speaker 3: hundred and twenty five percent tariffs, And so a lot
• 14:07
  Speaker 3: of it is really about China. In the US switched
• 14:11
  Speaker 3: from a policy of engagement with China to containment of
• 14:15
  Speaker 3: China during the President Obama's administration in twenty fourteen, and
• 14:20
  Speaker 3: then President Trump won, and then President Biden and now
• 14:23
  Speaker 3: President Trump two have continued that policy of containment. And
• 14:27
  Speaker 3: this is President Trump's agender is very radical. It's been
• 14:31
  Speaker 3: rolled out in the President's usual belligerent manner, but it's
• 14:36
  Speaker 3: completely consistent with a policy that really started in twenty
• 14:40
  Speaker 3: fourteen of containing China. So we shouldn't think look, I
• 14:44
  Speaker 3: think overall it's foolish the policy, but we shouldn't think
• 14:47
  Speaker 3: that it's not a coherent strategy.
• 14:49
  Speaker 1: Okay, very interesting, We've take a short break of what
• 14:52
  Speaker 1: we're going to do folks. In the next section is
• 14:53
  Speaker 1: going to look how this affects you and in what
• 14:56
  Speaker 1: way you may make moves around the basic principles that
• 15:02
  Speaker 1: have been outlined by Sam.
• 15:03
  Speaker 2: There.
• 15:03
  Speaker 1: And interesting that notion of the consistency of the towers.
• 15:08
  Speaker 1: It's not like they were never there. They've been there
• 15:11
  Speaker 1: in place, particularly in relation to China for some time.
• 15:14
  Speaker 1: It's the global globalization of them, if you like that.
• 15:16
  Speaker 1: Pus the shock so far. Okay, back in a moment. Hello,
• 15:26
  Speaker 1: Welcome back to The Australian's Money Puzzle. James Kirby here
• 15:29
  Speaker 1: with doctor Sam Wiley. Now, Sam, the one thing you
• 15:32
  Speaker 1: said there is interesting. I'm just thinking about allocation for
• 15:35
  Speaker 1: our investors. Whether you know, people were coming up to
• 15:38
  Speaker 1: me during the week asking about whether they should be
• 15:41
  Speaker 1: in growth or conservative of balanced funds when they have
• 15:44
  Speaker 1: been in big super and of course self managed super funds.
• 15:48
  Speaker 1: Some are taking some were some were just going to cash,
• 15:52
  Speaker 1: some were nibbling as they say, and some were making
• 15:56
  Speaker 1: some really you know, structural moves like setting gold and
• 15:59
  Speaker 1: buying ETA for instance. Now, one thing you said that
• 16:02
  Speaker 1: I thought was really interesting about sticking with the US
• 16:04
  Speaker 1: market the Australian super and the big super funds, but
• 16:10
  Speaker 1: Australian Super in particular has come out in the thick
• 16:14
  Speaker 1: of this crisis and the darkest well, the first what
• 16:17
  Speaker 1: might be the first phase of dark days a few
• 16:19
  Speaker 1: days ago when the markets were falling and they said
• 16:21
  Speaker 1: we're sticking with the US whatever. Mark Delaney, head of
• 16:23
  Speaker 1: Australian Super, it's got literally got news around the world
• 16:26
  Speaker 1: because there was very few, very prominent managers saying we're
• 16:29
  Speaker 1: sticking with the US. So that's a point I think
• 16:34
  Speaker 1: that I need to drive home. Should every day in
• 16:36
  Speaker 1: versitors look deeper in the US in terms of single
• 16:39
  Speaker 1: stocks or is it more like an index approach?
• 16:44
  Speaker 3: Look, I think in thinking about allocation of shares across
• 16:49
  Speaker 3: US shares global shares, let's think of global shares as big.
• 16:52
  Speaker 3: Any thing that's not US and Australia and Australian shares,
• 16:56
  Speaker 3: then the largest part should be in US shares and
• 16:58
  Speaker 3: in Australian chairs and the US For the reasons I
• 17:01
  Speaker 3: was talking about before, it's a big mistake to not
• 17:04
  Speaker 3: participate in the tech surge in the twenty first century,
• 17:07
  Speaker 3: much of the value of which is going to be
• 17:10
  Speaker 3: expressed in the US public markets. Created and expressing the
• 17:13
  Speaker 3: US public markets. It's a mistake not to have a
• 17:16
  Speaker 3: significant allocation to Ossie shares, and the reason for that
• 17:20
  Speaker 3: is that the Australian resident, Australian tax residents like you
• 17:25
  Speaker 3: and me, James and most of your listeners get the
• 17:28
  Speaker 3: benefit of franking credits. So foreign investors own slightly more
• 17:32
  Speaker 3: than fifty percent of the whole of the Australian stock market.
• 17:35
  Speaker 3: They're happy to own Australian shares when they could buy
• 17:38
  Speaker 3: shares from anywhere in the world. They're happy to own
• 17:40
  Speaker 3: Australian shares, but they don't get franking credits. So when
• 17:43
  Speaker 3: we own, when we own Australian shares, we get what
• 17:47
  Speaker 3: they get, plus the extra gravy of the franking credits.
• 17:51
  Speaker 3: So it makes perfectly good sense to have a significant
• 17:54
  Speaker 3: allocation to Australian shares and then to the rest of
• 17:58
  Speaker 3: the world. Europe is looking up a bit. Emerging markets
• 18:01
  Speaker 3: haven't done very well in the current crisis. Isn't helping them?
• 18:05
  Speaker 3: Isn't helping them so much? But I think Mark Delaney
• 18:08
  Speaker 3: is making the right call and he is getting He
• 18:11
  Speaker 3: is getting investors ready for the possibility that Ossie Super
• 18:16
  Speaker 3: won't be one of the two or three highest performing
• 18:19
  Speaker 3: funds in this particular year like it usually is because
• 18:24
  Speaker 3: of their high exposure in their balance funded, in their
• 18:26
  Speaker 3: growth fund to US shares. But he's saying, we're going
• 18:28
  Speaker 3: to ride through that and we're going to take the
• 18:31
  Speaker 3: long term view. One thing that Ossie Super doesn't do,
• 18:35
  Speaker 3: or does do that it is unfortunate, is that they
• 18:38
  Speaker 3: hedge out the foreign currency risk. They hedge out the
• 18:43
  Speaker 3: effect of the Aussie dollar going down. Now that's unfortunate
• 18:47
  Speaker 3: because it's better to be unheedged. One of the reasons
• 18:50
  Speaker 3: that you want to own foreign assets is that you
• 18:53
  Speaker 3: want protection against the Aussie dollar going down. When the
• 18:56
  Speaker 3: assiegolar goes down, if nothing happens to your US shares,
• 18:59
  Speaker 3: the new us as are just worth more, and it'd
• 19:02
  Speaker 3: be better if they didn't hedge out the Ossie dollar exposure.
• 19:05
  Speaker 3: And most of your listeners should not be hedged for
• 19:08
  Speaker 3: Ossie dollar exposures.
• 19:09
  Speaker 1: They probably aren't edged, but if they were given the
• 19:11
  Speaker 1: choice between two funds and one was hedged and one
• 19:13
  Speaker 1: was unhedged. You're saying God for the unhedged every time?
• 19:16
  Speaker 3: Are you go for the unhedged every time?
• 19:19
  Speaker 1: It's okay, very interesting.
• 19:21
  Speaker 3: You want some exposure to most of your exposure is
• 19:24
  Speaker 3: to the Aussie dollars in your income here I'm speaking
• 19:26
  Speaker 3: to our listeners, of course, in your income and in
• 19:29
  Speaker 3: the ownership of your assets, most of your exposure is
• 19:31
  Speaker 3: to the Aussie dollar. You want some exposure to other
• 19:34
  Speaker 3: currencies and especially to the US dollars. Simple diversification. And
• 19:38
  Speaker 3: if you hedge, you are unwinding that diversification and it
• 19:42
  Speaker 3: won't help you.
• 19:43
  Speaker 2: It's very straightforward.
• 19:43
  Speaker 3: Look, the super funds do it because they're compared to
• 19:47
  Speaker 3: each other. It's just an unfortunate equilibrium where they all
• 19:51
  Speaker 3: hedge and none of them will break away from that
• 19:55
  Speaker 3: because of the danger that they'll underperform. Free thing for
• 19:59
  Speaker 3: them to do is to do what all the other
• 20:00
  Speaker 3: super funds.
• 20:01
  Speaker 1: Do and do there fully hedge sam like fully.
• 20:05
  Speaker 3: It varies across the big funds. Ossie Super is fifty
• 20:09
  Speaker 3: to sixty percent hedged, and but other funds, some other
• 20:14
  Speaker 3: funds are one hundred percent hedged.
• 20:15
  Speaker 1: Yeah, okay, very interesting. Well, we're going to bolt around now, folks,
• 20:19
  Speaker 1: because I've got some on the show. It's an amazing week.
• 20:21
  Speaker 1: I want to talk to you about a couple of
• 20:22
  Speaker 1: things and it'll be busily quickfire. But there what doing.
• 20:26
  Speaker 1: Gold has been great. We all know there's no yield
• 20:29
  Speaker 1: off gold, but hey, it's been great this last few months.
• 20:34
  Speaker 1: Where do you stand on gold?
• 20:36
  Speaker 3: Weok, it's been awesome, especially in Australian dollar times. It's
• 20:39
  Speaker 3: gone through five thousand Ossie dollars. It was in two
• 20:42
  Speaker 3: thousand and four it was five hundred Australian dollars and
• 20:45
  Speaker 3: now in twenty twenty five it's five thousand Australian dollars.
• 20:49
  Speaker 3: So it's been absolutely awesome. The gold has been mostly
• 20:54
  Speaker 3: in the last couple of years, and this is true
• 20:55
  Speaker 3: a bitcoin as well, and why people sort of group
• 20:58
  Speaker 3: them together. Now there's been an alternative to the US dollar,
• 21:02
  Speaker 3: and especially people who are concerned about burgeoning US debt.
• 21:06
  Speaker 3: There's definitely a debt time bomb in the US, and
• 21:10
  Speaker 3: people who are concerned that, or a lot of investors
• 21:13
  Speaker 3: want to have some exposure to gold maybe bitcoin as well,
• 21:16
  Speaker 3: because when that bomb finally explodes at some stage and
• 21:20
  Speaker 3: the markets revolt against the growing US federal debt. Then
• 21:25
  Speaker 3: they'll be glad that they had a safe haven away
• 21:28
  Speaker 3: from that. Now do I mean to say that you
• 21:30
  Speaker 3: shouldn't be invested in US shares because that would be
• 21:33
  Speaker 3: contradict but I said earlier I don't mean that. But
• 21:35
  Speaker 3: what I mean is that at some stage it's going
• 21:37
  Speaker 3: to be a big problem with US debt. The US
• 21:40
  Speaker 3: will get through it. We should all be confident of that.
• 21:43
  Speaker 3: But in the process, people are going to be glad
• 21:45
  Speaker 3: that they had exposure to something alternative to gold and
• 21:49
  Speaker 3: to bitcoin. So and then look at the moment. Gold
• 21:53
  Speaker 3: and bitcoin both went down in the current crisis, which
• 21:57
  Speaker 3: is kind of surprising in it, and bombs went down
• 21:59
  Speaker 3: as well.
• 21:59
  Speaker 1: Which the last few days.
• 22:01
  Speaker 2: Yeah, You're earlier.
• 22:02
  Speaker 3: Point was that everything went down, even treasury bonds went down,
• 22:05
  Speaker 3: gold and bitcoin went down. It was a sell everything
• 22:07
  Speaker 3: moment and go to cash. People's concern about the president's
• 22:11
  Speaker 3: radical agenda. Yeah, and this is bitcoin and gold exhibit
• 22:15
  Speaker 3: that as well.
• 22:16
  Speaker 1: But you don't worry that the BONDDUS bawn market could
• 22:21
  Speaker 1: have a major outflow.
• 22:25
  Speaker 3: I don't think that's going to happen anytime soon. It's
• 22:28
  Speaker 3: just too large and too much the safe port in
• 22:31
  Speaker 3: a storm, ultimately too much of the risk free asset
• 22:34
  Speaker 3: for global investors. I don't worry that's going to happen
• 22:37
  Speaker 3: anytime soon. Look, I actually think James, that what's going
• 22:40
  Speaker 3: to happen. What we don't know is, I'll just be
• 22:43
  Speaker 3: very brief here. What we don't know is whether we
• 22:45
  Speaker 3: go back in the post COVID world, whether we go
• 22:48
  Speaker 3: back to the pre COVID world of powerful deflationary forces
• 22:54
  Speaker 3: where interest rates get cut close to zero, where central
• 22:58
  Speaker 3: banks introduce quantitative easing to try and fight deflationary forces,
• 23:03
  Speaker 3: trying to fight inflation falling too low. That was the
• 23:05
  Speaker 3: pre COVID world, whereas the pre GFC world was one
• 23:10
  Speaker 3: of trying to fight inflation and of higher interest rates.
• 23:14
  Speaker 3: And we don't know yet, and maybe we can talk
• 23:16
  Speaker 3: about this another time. We don't know whether we're going
• 23:19
  Speaker 3: to go back to pre COVID of low interest rates
• 23:23
  Speaker 3: and fighting deflation or pre GFC of higher interest rates
• 23:28
  Speaker 3: and fighting inflation rather than deflation. It's a very large
• 23:32
  Speaker 3: open question. Sorry I didn't answer it. Who were trying
• 23:36
  Speaker 3: to big brief?
• 23:39
  Speaker 1: Be nice if you could answer it. But you're talking
• 23:42
  Speaker 1: about US rates there. We'll put Australian Australian's particular local
• 23:46
  Speaker 1: issues to one side for the moment. You're talking global
• 23:49
  Speaker 1: rates led by the Fed Reserve.
• 23:51
  Speaker 3: I am, but deflate deflationary forces, which you know from
• 23:55
  Speaker 3: the GFC to to COVID. Interest rates were down, you know,
• 23:59
  Speaker 3: before COVID came along. This is in September, on the
• 24:03
  Speaker 3: first of October twenty nineteen, three months before anyone knew
• 24:07
  Speaker 3: the COVID even existed, the cash rate in Australia was
• 24:10
  Speaker 3: zero point seventy five percent.
• 24:12
  Speaker 1: People forget that the opsode I expect is at this
• 24:16
  Speaker 1: time there is at least the capacity to cut rates
• 24:20
  Speaker 1: should rates need to be caught.
• 24:24
  Speaker 2: That's absolutely right.
• 24:25
  Speaker 3: And it's also true that there's capacity for quantitative easing,
• 24:28
  Speaker 3: because not only has the Fed put interest rates up,
• 24:32
  Speaker 3: but it has unwound the quantitative easing that was undertaken
• 24:35
  Speaker 3: in COVID. So it really does have a couple of
• 24:38
  Speaker 3: shots in the locker, so to speak.
• 24:40
  Speaker 2: It has sort of reloaded.
• 24:42
  Speaker 3: Its ammunition to fight to fight these things, which that is.
• 24:46
  Speaker 2: A healthy state of affairs, without a doubt.
• 24:49
  Speaker 1: But as you say, it is only a scenario in
• 24:53
  Speaker 1: which that might be needed, all right, okay, well take
• 24:55
  Speaker 1: a break. A couple of questions I do want to
• 24:58
  Speaker 1: put in front of some which i've sort of killed
• 25:00
  Speaker 1: specifically for him back in a moment. Hello, Welcome back
• 25:09
  Speaker 1: to The Australian's Money Puzzle. James Kirby with doctor Sam Wiley.
• 25:13
  Speaker 1: He's been on the show before. You might remember Melbourne
• 25:15
  Speaker 1: Business School and the windle Stone Education Group.
• 25:19
  Speaker 2: Sam.
• 25:19
  Speaker 1: I wanted to ask you before I talk to listeners questions.
• 25:24
  Speaker 1: Have you any concerns about big super funds, about how
• 25:28
  Speaker 1: they're too big, that they are perhaps not as sophisticated
• 25:34
  Speaker 1: in their ability to deliver pensions to have a cybersecurity
• 25:38
  Speaker 1: of top notch. Basically, they became very big, they were
• 25:42
  Speaker 1: very good at accumulation and they are to some extent
• 25:45
  Speaker 1: at a moment of concern where they're not as complete
• 25:49
  Speaker 1: as we need them to be. At this point in time,
• 25:51
  Speaker 1: they've become so enormous.
• 25:53
  Speaker 3: Look, there is a problem. Just to go first, James
• 25:56
  Speaker 3: to the size issue. They are consolidating and I think
• 26:00
  Speaker 3: that'll go on. We'll get down to seven or eight
• 26:02
  Speaker 3: very large super funds.
• 26:04
  Speaker 2: These too.
• 26:04
  Speaker 3: Can here about the industry funds, there's still about thirty
• 26:06
  Speaker 3: industry funds. There used to be about one hundred and fifty,
• 26:09
  Speaker 3: but I think we'll get down to seven or eight
• 26:11
  Speaker 3: very large ones within the next ten to fifteen year.
• 26:13
  Speaker 3: Size works for them in two ways. One, it allows
• 26:18
  Speaker 3: them to make better investments into private assets, or we
• 26:23
  Speaker 3: could call them alternative assets. Infrastructure, private equity, venture capital,
• 26:27
  Speaker 3: hedge funds, private credit. All of those are private assets.
• 26:30
  Speaker 3: Sometimes people call them alternative assets, but I mean you
• 26:33
  Speaker 3: take infrastructure for instance, so Ossie Super with a couple
• 26:36
  Speaker 3: of other super funds bought Sydney Airport for twenty two
• 26:41
  Speaker 3: billion dollars. Now you can only do that kind of thing.
• 26:44
  Speaker 3: You can only buy those buy into those large infrastructure
• 26:48
  Speaker 3: projects if you've got scale and in the industry funds.
• 26:51
  Speaker 3: One of the best reasons for being in an industry
• 26:53
  Speaker 3: fund is because you get access to very high quality
• 26:57
  Speaker 3: private assets infrastructure, private equity, venture capitalist. Another thing is
• 27:01
  Speaker 3: it's allowed them to internalize their investment teams. So Mark
• 27:05
  Speaker 3: Delaney manages about sixty percent of their money now internally
• 27:10
  Speaker 3: with his investment teams. And Ozzi Souper has opened a
• 27:13
  Speaker 3: big office in London, a big office in New York,
• 27:16
  Speaker 3: an office in Shanghai. They didn't office open one in Mumbai, interestingly,
• 27:21
  Speaker 3: but they now have a global footprint, very good, very
• 27:24
  Speaker 3: high quality private assets and internalized investment teams which cuts costs.
• 27:29
  Speaker 3: What they don't have is good tech. You know, if
• 27:32
  Speaker 3: you were to compare the tech, I don't mean to
• 27:34
  Speaker 3: single out Ossie Superhare any of them, it would be
• 27:37
  Speaker 3: true if you compare the tech that Ossi super has
• 27:41
  Speaker 3: to the tech that the Commonwealth Bank has, I think
• 27:44
  Speaker 3: it's you know, the light years behind. And a lot
• 27:48
  Speaker 3: of that is because they just have very skinny fees.
• 27:51
  Speaker 3: They don't have enough money to spend on tech, and
• 27:53
  Speaker 3: tech is really letting them down. It's letting them down
• 27:56
  Speaker 3: in customer service and they've been in trouble with Appera
• 28:00
  Speaker 3: an Assic because of that and be fine because of it.
• 28:02
  Speaker 3: And again I don't mean to single out Aussie suber
• 28:04
  Speaker 3: this is two of all of the big industry funds
• 28:06
  Speaker 3: and it's let them down with cybersecurity.
• 28:09
  Speaker 1: Or at least their choose to not invest to keep
• 28:12
  Speaker 1: their fees little. It would seem that's correct.
• 28:15
  Speaker 3: Yeah, okay, And now that is that decision is proving
• 28:18
  Speaker 3: quite difficult and can get and it'll get worse of
• 28:21
  Speaker 3: course because we'll become more and more reliant on tech.
• 28:24
  Speaker 3: The cyber attacks that they suffered the other day, it's
• 28:28
  Speaker 3: partly understandable because the cyber attacks went to people who
• 28:32
  Speaker 3: are retired, you know, people who are And of course
• 28:34
  Speaker 3: there's two factor authentication. You go to change your password
• 28:38
  Speaker 3: and you get a text or an email or a
• 28:41
  Speaker 3: phone call saying, you know, can you authenticate that it's
• 28:44
  Speaker 3: you who's making the change. But someone who's eighty three
• 28:47
  Speaker 3: years old gets a text they're not paying attention, right,
• 28:51
  Speaker 3: or they get an email and they don't and they
• 28:53
  Speaker 3: look at their email once every three months when their
• 28:55
  Speaker 3: grandkids come around and do it for them. And that's
• 28:57
  Speaker 3: the So it's kind of understandable. You're dealing with people
• 29:00
  Speaker 3: who are not very tech savvy and using tech solutions.
• 29:04
  Speaker 3: Then two fact authentication it is tricky for them. But
• 29:07
  Speaker 3: the main issue is under investment in tech.
• 29:10
  Speaker 1: Okay, all right, I think folks, in terms of the questions,
• 29:13
  Speaker 1: Lucas and many others I'm sure wanted to ask about
• 29:16
  Speaker 1: how to be prepared for downturn on what to do?
• 29:18
  Speaker 1: I think we cover that in the first part of
• 29:20
  Speaker 1: the show. I also want them how Luke has made
• 29:23
  Speaker 1: the point that he thinks to him that I had
• 29:25
  Speaker 1: inferred in print and elsewhere about that if you if
• 29:29
  Speaker 1: you were unhappy with Big Super, that you know the
• 29:31
  Speaker 1: SMSF option is there. Luke is saying the SMSF is
• 29:35
  Speaker 1: unnecessary for listed assets and that many people have said
• 29:39
  Speaker 1: that they would prefer the security of a big fund
• 29:42
  Speaker 1: to an SMSF if in the event of sort of
• 29:45
  Speaker 1: a tech nightmare will leave. I think that's an open question,
• 29:49
  Speaker 1: except to say, to bring everyone up to speed, oz
• 29:51
  Speaker 1: Super has said to the unfortunate woman pensioner who lost
• 29:57
  Speaker 1: four hundred thousands that cyber attack, that they will ref
• 30:00
  Speaker 1: her completely. All right now, So we're getting one more question,
• 30:04
  Speaker 1: which is from Tom. I believe, says Tom, that the
• 30:07
  Speaker 1: US Treasury has recently bought two thousand tons of gold
• 30:11
  Speaker 1: Australian gold for delivery. I've been trying to work out
• 30:14
  Speaker 1: what they are hoping to achieve reduce US federal interest desk.
• 30:19
  Speaker 1: He says, could you help me understand this? So central
• 30:23
  Speaker 1: banks by gold all the time, First of all, you
• 30:28
  Speaker 1: might explain why they do that and whether it supports
• 30:31
  Speaker 1: the gold price. And maybe in terms of Tom's question,
• 30:33
  Speaker 1: there was that strange bout of activity where they were
• 30:36
  Speaker 1: rushing the gold over to the US because they thought
• 30:38
  Speaker 1: the gold might be hit with tariffs, I think, but
• 30:41
  Speaker 1: what was your understanding of it?
• 30:42
  Speaker 3: Well, if we take the IRBA, the Reserve Bank of
• 30:44
  Speaker 3: Australia for instance, the ABA holds gold, an amount of
• 30:49
  Speaker 3: gold on its balance sheet, and it holds foreign currencies
• 30:52
  Speaker 3: as well. And that's because the ABA, as well as
• 30:55
  Speaker 3: being charged with maintaining stable inflation and employment, as well
• 31:01
  Speaker 3: as having that as it's remet, it's also required to
• 31:04
  Speaker 3: stabilize the Aussie dollar. And so to stabilize the Aussie
• 31:08
  Speaker 3: dollar to buy when it's falling and to sell when
• 31:10
  Speaker 3: it's rising, which it will have been doing recently. It
• 31:13
  Speaker 3: would have been buying into the Aussie dollar falling from
• 31:16
  Speaker 3: sixty three to sixty cents and then selling in it
• 31:19
  Speaker 3: rising again last night. As well as having a foreign
• 31:23
  Speaker 3: currency to do that, it helps to have gold to
• 31:26
  Speaker 3: do that. So the RBA and most central banks own
• 31:29
  Speaker 3: an amount of gold to help to stabilize their currencies. Now,
• 31:32
  Speaker 3: the US has the privilege of being the world reserve currency,
• 31:37
  Speaker 3: so it's the thing that everyone wants to stabilize against,
• 31:40
  Speaker 3: and so they don't really need to hold gold for
• 31:43
  Speaker 3: that purpose. They have a lot of gold left over
• 31:46
  Speaker 3: from the US dollar being pegged to gold and the
• 31:49
  Speaker 3: unwinding of the pegging of the US dollar. The ability
• 31:52
  Speaker 3: to convert US dollars into gold started in the nineteen
• 31:55
  Speaker 3: thirties and ended in nineteen seventy two, when in ninety
• 31:58
  Speaker 3: seventy one when President.
• 31:59
  Speaker 2: Nixon put a complete end to it.
• 32:02
  Speaker 3: But they still have a lot of gold left over
• 32:05
  Speaker 3: from that. Otherwise they wouldn't own unigold at all. Why,
• 32:09
  Speaker 3: and some of that is held by the Treasury. It's unusual.
• 32:12
  Speaker 3: It is very unusual for the treasury to hold gold
• 32:14
  Speaker 3: as opposed to the central bank to hold gold.
• 32:18
  Speaker 1: US Treasury, Yeah, the US Treasury, Yeah, But why is that?
• 32:21
  Speaker 1: Why is it unusual?
• 32:23
  Speaker 3: Well, usually it would be a central bank function to
• 32:26
  Speaker 3: do that. The Treasury's responsibility is to raise money for
• 32:30
  Speaker 3: the government, and that to help the government to spend
• 32:32
  Speaker 3: the money and not to stabilize the currency. But there's
• 32:35
  Speaker 3: been periods of time in the US where the US
• 32:38
  Speaker 3: dollar was pegged to gold, but there was no central bank,
• 32:41
  Speaker 3: you know, the FED only came into existence in nineteen
• 32:44
  Speaker 3: thirty eight, and so the Treasury was responsible for managing
• 32:48
  Speaker 3: the pegging of gold to the US dollar before the
• 32:51
  Speaker 3: FED even came into existence. So it's a strange historical artifact.
• 32:56
  Speaker 3: You got plenty of them in the US.
• 32:58
  Speaker 1: And just one lasting for the every day listener who's
• 33:00
  Speaker 1: not a cross how it all works, Sake, What do
• 33:03
  Speaker 1: you mean by central banks need gold to stabilize their currencies?
• 33:07
  Speaker 1: What does that meaning is it? Why did they do that?
• 33:10
  Speaker 1: And does it give us assurance that gold really is
• 33:13
  Speaker 1: a stabilizer for our own portfolios?
• 33:17
  Speaker 3: Yeah, they look, they probably don't need it, James. Nowadays
• 33:21
  Speaker 3: they have much more sophisticated instruments. They have swap lines
• 33:24
  Speaker 3: with the FED. So in a crisis like COVID, the
• 33:27
  Speaker 3: FED and the RBA open up a swap line, which
• 33:31
  Speaker 3: says that the FED can borrow Ossie dollars from the RBA,
• 33:34
  Speaker 3: and the RBA, more importantly, can borrow US dollars from
• 33:38
  Speaker 3: the FED, and that bilateral ability to borrow each other's
• 33:41
  Speaker 3: currency at a fixed rate is referred to as a
• 33:44
  Speaker 3: swap line. And that's a much more. But swaps are
• 33:47
  Speaker 3: a very modern thing, right. They only came into existence
• 33:50
  Speaker 3: in the nineteen eighties and nineteen nineties and so look,
• 33:54
  Speaker 3: with the modern instruments that reserve banks have, they really
• 33:57
  Speaker 3: don't need gold. But it goes on and that's the
• 33:59
  Speaker 3: reason why I was there in the first place.
• 34:02
  Speaker 1: Terrific to talk to you, Sam, Doctor Sam Wiley, Windlestone
• 34:05
  Speaker 1: Education Group in Melbourne Business School. Great have you on
• 34:07
  Speaker 1: the show, Sam, and I love the week we chose
• 34:09
  Speaker 1: to have you. I mean that was a bit of luck.
• 34:12
  Speaker 1: So we got you today. Thanks a lot for coming on.
• 34:14
  Speaker 2: Thanks, James really enjoyed it.
• 34:17
  Speaker 1: That was doctor Sam Wiley. Okay, folks, now obviously keep
• 34:21
  Speaker 1: your eyes wide open in the days ahead. As I say,
• 34:24
  Speaker 1: it's an extraordinary period, highly volatile and highly volatile by
• 34:28
  Speaker 1: the way. It means share markets fly up and down. Okay,
• 34:32
  Speaker 1: so they flew up this week, they flew down this week.
• 34:34
  Speaker 1: Let's see what happens next. Keep those emails rolling the
• 34:37
  Speaker 1: money puzzle at the Australian dot com dot a you.
• 34:41
  Speaker 1: Today's show was produced by Leah Samaglue.