Transcript - Equity Mates Investing Podcast



SUBJECTS: Global Financial Crisis; global economic conditions in 2018; secular stagnation; monetary policy; China; structural reform; housing; cryptocurrency; retirement; Barnaby Joyce

BRYCE LESKE: Equity Mates Episode 31. Great to be back, as always. It’s been another good weekend here in Sydney. As always, I’m joined by my good buddy Ren. How are you going?

ALEC RENEHAN: I’m very good Bryce. It’s been a pretty chilly weekend down here in Melbourne, but what better weekend than to settle down inside with a cracking podcast.

LESKE: Exactly. And don’t we have that episode for you.

RENEHAN: Very excited about this one.

LESKE: We’ve had it in the pipeline for a while and we were lucky to speak with Wayne Swan last week and discuss about what themes or predictions are coming in 2018 from his point of view. He’s just about to write – or he’s probably finished – an essay about what is to come in 2018 from an economic point of view. So we were lucky enough to go through a few of the things that he discussed. So for those that are unaware, Wayne Swan is an Australian politician. He was actually the Deputy Prime Minister of Australia and the Deputy Leader of the Labor Party from 2010 to 2013. He was also the Treasurer of Australia from 2007 to 2013. So he has a wealth of experience and we were able to pick his brain on everything from the GFC in 2008/9 and how he handled that as the Treasurer of Australia through to what he thinks is going to come in 2018. It was a very enjoyable conversation, wouldn’t you agree Ren?

RENEHAN: Yeah definitely. We should note that we tried to bait him into making a big prediction with our first question. He shot it down straightaway so listen out for that. But no, listen to his take on some really interesting topics from China, to Bitcoin, from Australian housing, to income inequality. And right at the end – I know we’re a little bit too late for this, but he makes a prediction about Barnaby Joyce. So we should have released it earlier this week, I’m thinking.

LESKE: I know, damn! Anyway, so we’re excited to bring this one to you guys. Before we get stuck in, do you want to mention anything else, Ren?

RENEHAN: Yeah definitely. So the annual Warren Buffett letter to shareholders was released overnight.

LESKE: Huge.

RENEHAN: It’s obviously a big deal for investors to read what the great man himself is thinking. So you don’t have to find it yourself, we’re going to be including it as the first link in thoughtstarters tomorrow morning. So if you’re listening to this, make sure you sign up to thoughtstarters. If you’re listening to this and it’s past Monday, you can check out old editions of thoughtstarters at where you can read Warren Buffett’s 2017 letter and a lot of other interesting articles.

LESKE: And for those that are new to the show, Ren, welcome. And can you just give a brief rundown of what thoughtstarters is?

RENEHAN: Yeah so thoughtstarters is a weekly email to your inbox of five interesting and thought-provoking articles that are loosely based on investing. So they’re not always going to be finance-heavy, they just can be things that have taken our interest and things that we hope get you thinking.

LESKE: Nice. And that comes out every Monday. So get on it.

RENEHAN: You can sign up on our website or on our social media, just see some old editions if you like what you’re reading you can sign up on that page as well.

LESKE: Done. So without any further ado, here is our interview with former Deputy Prime Minister of Australia and Australian Treasurer, Wayne Swan.

RENEHAN: So Wayne there’s a lot of talk as we come into 2018 about an overheated market, and we’re hearing comparisons to a number of historic bubbles, notably the 2008 bubble and the lead-up to the GFC. Given you were the Treasurer of Australia during the GFC, are you seeing any similarities between then and now and do you think we’re likely to see a correction or a crash this year?

WAYNE SWAN, MEMBER FOR LILLEY: Well I think those sort of predictions are all irresponsible. Global growth has been anaemic for years and years. This year it’s forecast to get back to an average that we would have expected prior to the Great Recession. What you’re seeing in the global economy now, for the first time since 2007, is two of the very big engines of the global economy that have been misfiring for the last six or seven years, notably the United States and Europe, now firing. So, we’ve got much more balanced growth in the global economy. More balance than we’ve seen in any time since the Great Recession or what we call the Global Financial Crisis. Because through the crisis and coming out of that crisis, global growth was largely driven by the developing world, plus little old Australia. So it’s good to see global growth more broadly based, than it has been, really, any time since the Global Financial Crisis. Now whilst it’s true that you’ve got a lot of frenzied activity in the stock markets, which doesn’t necessarily reflect the underlying fundamentals, but that happens pretty frequently, as you’d well be aware. But the underlying fundamentals here are that global growth is getting back to what you’d call around trend levels or maybe a bit above. My own view is that the threats to that are not as much economic as geopolitical. But there is, I think, one big policy threat, and this is the issue which is driving the US Dollar down at the same time as exuberance is driving stock prices up. And that is the adverse market reaction to Trump’s tax cuts, which many in the financial markets are seeing that as being akin to throwing petrol on a fire. So you’ve got the US not at full employment, there’s still a degree of slack in their labour market, but they’ve done pretty well, and they ought to because they’ve been on their knees for so long. But many people fear the impact of those tax cuts, blowing out the US budget deficit. So responsible investors around the world, policy makers and central banks are looking a bit aghast, that the United States, when it finally gets close to full employment after what occurred at the end of 2007, throws a bit of petrol on the fire and gives a massive unfunded tax cut with all of the ramifications that could flow from that in the future. So that, I think, is a warning signal which is seeing the decline in the US Dollar that markets are pretty apprehensive about what they see as a large, unfunded tax cut which is a stimulus and the last thing the US economy needs at the moment, given the state of its budget.

RENEHAN: Yeah definitely, and we want to touch on tax cuts a little bit more, and especially tax cuts in an Australian context a little bit later, but picking up on something you said in your answer there – when you talked about how it took ten years for global growth to pick up after the financial crisis, what do you think were the drivers of that and why do you think it took so long for growth to come back to the developed world.

SWAN: Well, the reluctance of policymakers to use fiscal policy to revive growth in a world which had been scared and uncertain about the future. So what you’ve witnessed around the world through much of that period is what Larry Summers, I suppose, has called secular stagnation: that is, a huge pile of private savings, which has simply been sitting there, and it hasn’t been invested. And what that requires is active steps by a responsible authorities across the developed world to have a stronger fiscal policy. In the absence of that stronger fiscal policy, growth remained anaemic, unemployment around the world remained high and we saw unnecessary capital and skill destruction, particularly in the United States, but also across many other countries. And had governments moved, the Reserve Bank governors would not have had to have taken such extraordinary steps as they took. So essentially they were backed into a corner by the reluctance of survival-of-the-fittest Tea Party ideology to not make the necessary investments they needed in their economies to kick‑start, if you like, investment. So I think one of the great tragedies of the global economy has been the reluctance of responsible authorities to borrow money very cheaply to invest in the future of their economies and in particular the future of productive capacity through investment, particularly physical infrastructure but also human infrastructure.

LESKE: So you mentioned there what the Reserve Banks around the world did in response to the crisis, and in many cases they filled the void of government spending, as you said, with quantitative easing, where they pumped money into markets and into assets, and then also with record-low interest rates. We’re only just coming out of that period 10 years after the GFC. Do you worry that the Reserve Banks don’t have a lot of powder dry if something was to happen again?

SWAN: Well I think it is a legitimate concern. Of course it is. You’ve only got to pick up any piece of economic commentary to see that reflected. It’s just that’s not the fault of the central banks. So we’ve got to keep our fingers crossed that all is well. You see, the other concerning issue is also related to the United States, because the unregulated market that led to the Global Financial Crisis and the Great Recession, which was re-regulated during this period, is about to be – or is currently in the process of being – unregulated yet again. So you see Dodd-Frank under the gun in the US and a lot of rhetoric about the loosening of regulations across all areas of the financial sector. I was very much associated in my time as Treasurer with all of the actions taken through the Financial Stability Board and others over time, putting in place a whole new regulatory framework, which has only just been completed, largely in the last 12 months. To see now Donald Trump pull it apart, that’s very concerning as well.

LESKE: Wayne, we understand you’re in the process, or potentially have finished writing an essay on what’s to come in 2018. Alec and I did an episode a couple of weeks ago about this and we had a punt at a few things and predictions that were our own; Alec’s being that Amazon will be all huff and no puff and I put on a case of beer with him that 15th of September we’ll see 20 per cent drop in the US stock market. Now I don’t know if you’ve included them in your essay or not.

SWAN: I wasn’t going to be that specific! I would hope that on the 15th of September which is the 10th anniversary of the collapse of Lehman Brothers, that we see a lot of studious reflection of what went wrong and stop starting to repeat the mistakes that actually caused it.

LESKE: I would agree. So what are some of the main predictions that you see playing out over 2018 from an economic point of view?

SWAN: I think now it is much more greatly appreciated around the world among policymakers, increasingly so, whether you’re dealing with the Governor of the Bank of England, Christine Lagarde of the IMF, or business leaders like Jeff Immelt from GE or Larry Fink, who spoke out the other day that unless we’re serious with structural reforms that do something about the growing levels of, and concentration of, income and wealth in the hands of a few, then it’s hard to see how the global economy is going to get a head of steam. The issue in terms of global growth that most people focus on is what’s going to happen in China. And I think one thing that is different about China now, than what we’ve seen in recent years is they are now, I think, quite serious about doing something in their financial system and at the same time, attending to excessive credit, bad loans and so on. They’re doing something much more serious about environmental pollution. The two things combined – and the Reserve Bank pointed to this in the Statement on Monetary Policy – they two things combined mean that growth in China isn’t going to collapse but will certainly probably be a little lower than it has been for some time. So in my view the engine of China, which has driven and still drives I think up to about a third of global growth will be attending to its long term challenges much more seriously. Someone said to me – and I’ve spent a lot of time in China, spent a lot of time with the current governor, who’s been there for awhile, a very good public servant – that this time it appears they’re not going to kick the can down the road and they’re much more serious about dealing with their issues of bad debt, bad loans and washing that out of the system. So that’s one thing. The other thing is that the pattern that we’ve seen of an increasing concentration of wealth in the developed world and the hollowing out of the middle classes and the creation of vast armies of the working poor, is now a pattern which is beginning to replicate itself in those that have been the beneficiaries of global growth over the last 30 years, namely the developing world, where millions of people at the bottom have been lifted out of poverty and middle classes have been created. But we’re now starting to see in those countries the beginnings of the replication of the inequality that we’ve seen across the developed world. The economics of inequality are well-known to everyone. I mean you provide a shrinking percentage of GDP to the people who actually do most of the consumption, well the economics of that are pretty horrible for economic growth into the future. So I think two things stand out: China, dealing with these challenges, which is good for everybody, if they can do it in a way that is not disruptive to the enormous contribution that they make to the global economy, but secondly, recognising the time has come for the developed world to deal with the poison of trickledown economics and put in place a more balanced set of structural reforms which will drive growth sustainably into the future.

RENEHAN: They’re both big topics and we definitely want to unpack them in a bit more detail. But to start with economic inequality, you talked about the developed world needing to put in place structural reforms – do you have any particular reforms in mind? And are there any countries that are doing particularly well, that you think Australia and the rest of the developed world can model themselves on?

SWAN: Well the rest of the world used to look to Australia as having a good recipe for that but we’ve started to ape their policies which deliver inequality. But look, there’s two things that stand out among a whole series of structural reforms that are required to deal with growing inequality of income and wealth. The first one is a return to progressive taxation and a rejection of regressive taxation which has taken hold across the developed world, and putting some real progressive tax measures into the system, so that you can drive the investment that’s required and the public goods that make the economy go around. Secondly, doing something about the voice of labour and making sure that working people have got a degree of bark. Now they’re the two big ones that stand out, both of which won’t work unless you have accompanying political reforms. And the political reforms that are needed to accompany that is doing something about the power of big money in politics. Because if you don’t do anything about the power of big money in democratic politics, you will continue to get labour being squashed and tax systems made more regressive.

RENEHAN: Yeah it’s a really interesting question, and it’s an argument that a lot of people make, and it’s something that I’m very receptive to, about the power of money in politics. What I haven’t heard is a model of what would work, in terms of publically funded elections or limiting spending but then finding a way to not have the SuperPACs that seem to emerge in America. What would your model look like?

SWAN: There are very obvious things, some of which we already have here. First of all, one vote one value, which doesn’t exist in the United States. Secondly, compulsory voting, which doesn’t exist in the United States. Thirdly, some real laws with teeth that control the power of big money and how it is spent in elections. And we’ve got to do a lot more here now. Our system worked for a while and constrained it. It doesn’t do it to the extent it should. We’ve had public disclosure but people are working their way around it. Britain’s got some pretty effective laws about donations and spending in elections but at the core of what’s going wrong in the United States is the rampant gerrymanders that make the notion of one vote one value laughable. And that’s a big problem in that country. Compulsory voting I’m sure is not going to be everyone’s cup of tea but it certainly draws your political system to the centre, whereas a voluntary system of voting pulls it to its edges, both left and right. And then campaign reform. But there are other big areas that are increasingly important. Media reform. They used to call the media the fourth estate for a very good reason; it was very powerful and it was seen as independent. And it was an effective transmission mechanism to tell fact from fiction. Increasingly, the way in which technology has disrupted traditional media, the ownership of traditional media itself, the emergence of social media and the way it applies, that transmission mechanism in modern democracies is broken and there has to be a lot of discussion about how that is attended to.

RENEHAN: Do you think that’s a case of government reform and government regulation being able to solve that problem?

SWAN: It’s not all a question for government, just as the economy’s not just about government spending. I happen to think in this country much of the challenges we’ve got in the economic system isn’t a question necessarily of the size of government, it’s a question of the ethics, morality and operation of the private sector.

RENEHAN: Yeah, ok. So turning to the second big theme that you raised, which was China. Obviously, prior to 2008 China bought a lot of our minerals and that has seen Australia’s mining boom take us through a pretty turbulent period in global economics. Do you worry that this internal reform that China’s going through and the economic slowdown that might result – do you worry about the second-order effects that will have on the Australian economy?

SWAN: Not especially, and by the way, China didn’t take us through the Global Financial Crisis. The mining boom that came along didn’t really surface until the end of 2009, early 2010. It certainly, along with our stimulus, and its tail buttressed us from the real shakiness and tremors that were going through the global economy right through 2010/2011/2012/2013 so it was certainly valuable from that point of view. But the Australian economy’s much bigger than mining. You wouldn’t think it, the way in which people talk about the economy. But we’re a very big services economy. The 12th or 13th largest economy in the world. And it is true that China’s very big economy, but China’s very big in everyone’s economy. So yes it’s important for us, and yes we’re very luck we’ve got the higher-grade commodities that they need, and that puts the icing on the top for Australia, but it’s not the be-all and end-all of our economy. They realise, like we realise, that the future of their economy lies in going up the value-added scale, lies in investing in their people and in technology, and it’s how we manage that transition, and how China manages that transition that’s critical for all the economies in our region. And I’m up talking in Indonesia next Monday and the real question is, as China goes up the value-added scale, where do many of those lower skilled and manufacturing occupations go? How do other countries in the region tap into an expanding services sector? All of those things are quite complex, and not just a question of Australia-China; it’s a question of China and the rest of the world of which Australia is a part.

LESKE: Wayne, another theme of 2018 that we’ve been discussing on the show is obviously the Australian housing market, and more specifically Sydney and Melbourne, and how there’s a lot of commentary at the moment about the fact that it’s quite overheated and we’re starting to see a bit of reversal in prices. And with the potential for interest rate rises over the next 12 months and revelations about mortgage fraud and liar loans and those such things, do you have a view on where the Australian market might be heading over the next 12 or 24 months?

SWAN: It desperately needs the reforms that we have argued for in the last election. It’s been pumped up too much by leveraged investment in housing, by negative gearing. And that’s not been healthy for the sector or really for the Australian economy in the long run. But many of these price increases and so on have been a feature of an economy that’s had steady growth. I think our economy should have grown much more strongly in the last two or three years than it has, given how low the dollar has been and given our relatively low interest rates compared to just about anywhere in the world. There are two very big stimuluses – a lower dollar and low interest rates – both of which weren’t available to me when I was Treasurer, even at the height of the Global Financial Crisis. So there’s been stimulus there, which we’ve not, I think, effectively managed, and we needed much more investment in our critical economic infrastructure, and less in parts of the housing sector. But the incentives have been all wrong and they still need to be fixed.

LESKE: So one of the hot topics of 2017 was obviously Bitcoin and the cryptocurrency markets, so going into 2018 it seems that a number of governments are starting to step in and regulate it a bit more. What’s your view on Bitcoin and the crypto market and where does the role of government come into play with these sorts of things?

SWAN: Well, I mean, I suppose government has got to set up a framework to protect investors from themselves. I mean, I don’t know why anyone would particularly want to go and invest in Bitcoin–

LESKE: You’re not in it?

SWAN: No I’m not! But if people want to throw their money and wash it down the dunny, then let them do so. I mean, they’re actually making money out of it at the moment, but somewhere along the line, it’ll all even out. But yes, if there’s a market out there that people are engaging in, it’s worth a look at from a regulatory point of view, but I don’t see it as a mass market.

LESKE: Right.

SWAN: I mean, there are far more important discussion to be had about what the fintech revolution is going to do to traditional banking and how all that plays out, and what the role of regulators is in all that and what are the frameworks for the future that protect punters who don’t have the luxury of playing with Bitcoin, but just want to make sure they protect their family finances, have a roof over their head, and to look after their kids. And the fintech revolution is going to bring up some pretty substantial change to traditional banking, and I know that’s where our regulators have been looking.

RENEHAN: So Wayne, we know we’re almost out of time. And we’re about to ask our final three questions that we ask in every interview. But before I do, you’ve sadly announced that you’re not going to be recontesting the next election.

SWAN: It’s got some people excited.

RENEHAN: Given that you don’t have to worry about re‑election anymore, how are you going to use your last year and a bit in politics? Are there any particular issues that you’re going to push that you may not have been able to push as hard because you had to worry about re-election or anything like that?

SWAN: Some people have described me as “unplugged” and largely, if you look at what the sort of things I’ve been doing or saying, they’ve been consistent since, basically I was re-elected in Lilley in 2013 and didn’t go back on the front bench. So I’ve been out there articulating my view, based on my experiences as treasurer and my view about what we need to do for the future of the country, to lift living standards, and share that lift in living standards more fairly across our people. And I think it’d be fair to say I’ve taken on a few topics and a few individuals and a few institutions that aren’t very happy with me. And the bad news for them is I might be getting out of Parliament, but I’m not getting out of politics. And I’m going to continue to articulate those views, because I think they’re important to the future of the country. In 2012, I wrote an essay called The 0.01 per cent: the power of vested interests in Australia. I’m updating that now and I’m going to update it because I think one of our economic challenges is we can’t get the essential structural reforms we need in this economy because of powerful vested interests who don’t see it in their immediate economic interest to support them. And by that I particularly mean organisations like our biggest banks ad our biggest mining companies.

LESKE: Look forward to reading your essay when it’s published. It sounds pretty interesting. We’ll finish with a quickfire three questions that, as Alec said, we ask all of our guests at the end of each interview. So to begin with, Wayne, what is a book or books that you consider a must-read?

SWAN: There’s two books I’ve read recently: John Edwards’s book on John Curtin. A must-read for any Australian patriot. And the other one is a book by Nancy McLean, called Democracy in Chains, which explains how the radical trickledown right took control of politics and power in the United States over a 50-year period.

LESKE: Alright. So flowing into that, our next question is usually framed around an economics and investing. Do you have a particular source that you would encourage our listeners to start getting around? What’s your source of information these days?

SWAN: I always read the Financial Times. That’s my go-to on what’s really happening in economics. And one or two columnists in the Financial Review in Australia, but not its editorial. But more broadly on economics, I read pretty widely. I get most of the reports. Shane Oliver, for example, I think is consistently good. There are many others – stuff coming out of the Comm Bank. I mean, just about all of the bank stuff that I read is pretty good. And generally, it’s a habit that I had when I was Treasurer, and I haven’t given it up, that on a Friday, or whenever they’re putting their weekly thing out, I’ll have a read. Westpac, you know, Bill Evans. I read all that – or glance, I don’t read in the detail I used to – but I glance at a lot of that stuff. So I’d say, don’t depend on one source. Have a bit of a look around. And most of that stuff is readily available and easily accessible and basically they’ve done it in bite-sized bits now, where you can pick it up and get a handle on it, and that’s what I do.

LESKE: Yeah, I agree. Read widely. So to finish the final three: what’s one piece of advice you would give to your younger self. And it could be anything.

SWAN: Yeah well I gave it – I said this the other day when I announced I was not running again. And that was that I do regret that during the intense period of my Treasurership, because basically it was consumed in the first few years by the crisis, then by internal challenges in our party while we were trying to do carbon pricing and a whole lot of other huge reforms, that I didn’t take more time out of that sort of fraught schedule just to exercise and to think more clearly about where we were. It was just such an intense period. So I think for anyone who’s involved in very difficult challenges and very long work hours, which are absolutely unavoidable when you’re in jobs like mine and many others, just make sure you carve out a bit more time for personal exercise and reflection than necessarily your diary might give you.

LESKE: I like that one, that’s good.

SWAN: And that includes family time.

RENEHAN: So Wayne, that brings us to the end of the interview. Now just before you go, this interview has been about predictions for 2018 and I think we’d be remiss if we didn’t finish by asking: what do you think 2018 holds for Barnaby Joyce? You don’t have to answer that if you don’t want to.

SWAN: No, no. The answer is not much.

LESKE: Yeah, right.

RENEHAN: Do you think he’ll stay as Nationals’ leader?


LESKE: Wow, yeah. We’re looking forward to seeing how it all plays out. But Wayne, thank you very much for coming on Equity Mates. We’ve really appreciated your time and some of the wisdom that you’ve given us today about what’s to come in 2018. We’re looking forward to the release of your next essay, and all the best with life after politics.

SWAN: I’m told there is one!

LESKE: You’ll have to let us know! We really appreciate it, good to talk.