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But now it's different. Today's volatility actually feels structural rather than cyclical. The profit bubble has ended. How can you plan if there's a tariff one day? Oh, but we're going to put a 90-day moratorium on it. It's chaos that's the problem. We're seeing a huge anti-America sentiment and it's a loss of confidence. The loss of confidence will ultimately lead to a recession. why we must look forward and ask ourselves is this time different. Welcome everyone. Without further ado, let me introduce you to my dear friends who I've known for coming on 30 years in both cases. Michael has been involved in the financial services in industry for over 40 years. He's held a diverse range of positions in stock broking, investment banking, government, and funds management. Michael is an adjunct industry professor here at UTS and chief investment officer at Belmont Securities. Previously, he was a strategy and governance consultant for Mine Super. Michael has undergraduate qualifications in accounting, financial planning, finance, philosophy, and post-graduate qualifications in law, applied finance, economic history, and economics. Wayne has a long and distinguished career in Australia and in the UK. trained as an economist, which we won't hold that against him for now. He has worked at ABS, Productivity Commission, Commonwealth Treasury, and McCory Bank. Turning to trading, he worked at Banker's Trust in London during the Gulf War, and he then returned to Sydney to rejoin McCory and funds management business where he had a number of roles in asset allocation, fixed income before spending 10 years as an executive director and global head of fixed income and currency and commodities at McCory. He recently was the head of Mercer's UK investment consulting business before returning home here to Australia in late 2022. His current project is thinking differently about the markets, a joint venture with the PCF to both advise and educate those responsible for constructing and advising on multiasset multi manager portfolios. Wayne is is also passionate about politics, which no doubt will show, history and the arts. And as he likes to say, he's a longsuffering supporter of the Camber Raiders. Me on the other hand, I like my friends here have uh 35 years plus experience in financial services. Started out in the US as a financial regulator, moved to Australia in 1989, worked as a portfolio manager, an asset consultant, and then finished at Lazard Asset Management where I was a CEO for Asia-Pacific. Since then, I have taken several advisory and consulting roles within the financial services and continue to do so. And I'm also a proud industry fellow here at the UTS finance department. And thank you for joining us for the launch of the what we're calling circle the square which is a new lunchtime roundt series uh hosted by the UTS business school and finance department. This series will be conducted on a quarterly basis and whose aim is to bring investment professionals and practitioners together uh along with the academics and the students of UTS to uh push beyond the boundaries of mainstream financial thinking. Uh each quarter we will examine ideas that hopefully will challenge conventional wisdom and test our fundamental assumptions about the markets and how we operate within the markets. We open perhaps this series with an enduring belief within finance which is this time is not different. Over history we've been littered with examples of oh is it different this time? Should we be looking at it differently? And inevitably, of course, markets revert. Sure, stocks fade, disruptions pass, and they usually do, and we go back to the norms, the normal parameters that we've become accustomed to. But these past 100 days have made even seasoned investors pause. And markets are reacting more to the emotion of what's going on than the actual fundamentals. One thing I also would like to stress is that although there will be moments where we're talking about politics, be assured we're not being political. There's a grand difference there. We need to assess the political statements under the lens of an economist, an investor, ultimately how the market would do it. The markets are agnostic as to who we voted for, but they're much more active as what investment fiscal policy means to the overall economy and of course to the litmus test to our portfolios. Today we ask cautiously but seriously, could it really be different this time? It's a question meant not to provoke certainty, but rather to hopefully create conversation amongst ourselves because all too often we're littered with a conversation. If you pick up the press, will the central bank, be it the Fed or the RBA, cut interest rates? What we're talking about here is much more profound than whether or not the RBA or the Federal Reserve will cut interest rates by 25 basis points or 50 basis points in the next month or three. So, let's uh kick this off if I may. We're going to be talking about the tariffs and how for the first time in a very very long time we are seeing the markets react to politics. You would have to really go back to the Louver Accord when was the last time you saw political interference which moved and spooked the markets. And so it's not too surprising that many of us when we hear about what's going on the politics there's fatigue. It's hard to turn on the news without seeing something and we stop paying attention. But we should be paying more attention because for the first time in 40 years we are seeing political drivers moving the economy in a meaningful way. Volatility used to be cyclical a statistical figure which one could forecast valuations leverage and policy tightening. Again this is something that we're accustomed to and our models are fine-tuned to read changes in pol mon monetary policy and how that will relate. But as political drivers have been pretty much non exposed and interference within the stock market, we have looked past it. Whether the government was left-leaning or right-leaning, for the most parts, governments maintained and worked within the rules and the norms of economic policies that the markets demand from it. But now it's different. Today's volatility actually feels structural. rather than cyclical driven by political instability as opposed to capital excesses. So the question we really need to ask ourselves is is this a chaos riddled politics? Is this something that is actually going to be moving the markets and what we need to be looking at it? Are there legacy issues that we need to reassess and modify as a result? So getting straight into it if I may to open up to the panel. How have you seen these u political factors? Have you ever in your lifetime seen anything like it? And if you have, what was the implications on the overall way you managed money, let alone the the way markets reacted? I I've certainly uh never seen anything like what is happening. Um and uh I I I think the the thing that people underestimate about what is happening is the sheer chaos of it all. It's not about which party the president's from. It's it's about the man and how you can how you can sort of make an announcement on a video from the Oval Office one day and then say something completely different the next, followed up by a tweet on your own social network over the weekend. that it then gets corrected by one of your cabinet that then someone else then says something and which seems exactly opposite. It it it it's created what people I know in the markets are calling just like fatigue. No one has any clue what to do. And that should not be surprising. Sure. But we've seen um unhinged and unstable fiscal policies before. Um but this one obviously is takes it to appears at least as so the market's responding takes it to a whole other level. I don't sure it's so much about fiscal policy. I I think it's it's um you know the the risk of getting into politics. any political analyst, any any advisor um to politicians that do market research on political attitudes have been pointing out for a very long time the big political issue in just about every country, particularly Western countries, is so-called inequality and the so-called left behind people. Trump in MAGA, which by the way everyone should know is actually in no way original. Ronald Reagan said it. So did Bill Clinton. uh you know it's a the all he managed to do is get a lot of red hats made that he made a lot of money out of no doubt manufactured in China. Um but but I think this this level of political upheaval uh is certainly something that you would see in you know the risk of being disparaging the various emerging market countries that have gone through t turmoil. Um it's not something you would expect from the world's largest economy. Um, and from even though one can debate the nature of American democracy because there's lots of different democratic models of which I firmly believe we have the best in the world having lived in the UK as long as I have. Um, it it it I just don't know what people do. You can't make an assessment of where you think any asset price is going when the market is going to move several percentage points on some post in the middle in some cases in the middle of the night. Well, the politics of disruption, let's let's be real here. The politics of disruption is something that Trump himself had campaigned on. He campaigned on I guess throwing out these the rule book and recreating and he told us what he would do. um yet many of in the market basically yeah that's really more bravado and theatrics than the reality and then project 2025 came about and so far I've read about 40% of what project 2025 has outlined has already been implemented so we cannot say that this administration hasn't forewarned the market nor the voters of how they were doing but let's take it back into a a reality that from our perspective here in Australia when the hawk keing era when there was major changes to the rule book and f forced the investors and the market to readjust how it modeled and managed offshore currencies because of course that was one of the drivers and the changes. So Michael you mentioned you had 40 years experience you I'm sure you were around in that time period. What was the market like when it was implementing such equally radical changes? granted in a different light but nonetheless radical at the time. So I'm going to hark all the way back to your original question and I'll get there eventually. So the first part is I would ordinarily say every time I've heard somebody say to me this time is different. It's normally a signal to run for the hills and know that it's not. So, I've seen a lot of things happen in my time in the markets, but I've never seen a situation where we are today where everything is happening all at once. Um, so much so that I think we're in a bubble of everything. So, when it comes to now what do you do and what happened in Australia? So I think for me the hardest thing is something which you mentioned is that the changes made by the Trump administration are haphazard and don't make any sense at times. What do you what can you do as an investor? You can either say listen my kids are right just buy crypto and gold and go home. or you can adhere to sound fundamentals and that's what I'm doing but only in the absence of anything else in Australia in the 80s as it happens I was working in Camber in the middle of it so I can tell you what went on there but they were part of a very structured program obviously I think it's very interesting that some of the greatest things that happened in Australia, which generally you'd expect to come from a conservative government, came from a left-wing government. Things I'm talking about like floating the Australian dollar, deregulating the banking, um continuation of Goff Whittam and free education. It's very unusual to see these all having come from the Labor side of politics, but it was part of a very structured plan. It's funny you should say that because what's happening in the UK at the moment is exactly like that. You have a Labor government run by a competent person doing many of the policies that the Conservatives failed to implement like shutting down NHS England which was pure jobs for the boys, things like that. It does happen which dare I say you should treat left and right those imposters just the same. So getting getting back to trying to compare and contrast um 2025 Trump with um 1983 Hawk. Well, the first thing is that I reject the idea that anyone thinks that what Trump is doing has not been well signaled to the market. He's been talking about tariffs forever. He had a platform. Um why is a tariffs the first cab off the rank? and that's because it can be executed um by executive order. So I fully expect there to be more things should he be able to get um support from the Senate and Congress in other areas. But tariffs is the first thing that he's attacking. But let's be clear on that point because it's it's tariffs is nothing new. It's been done by left and right politics. Uh even Clinton himself imposed some tariffs. But in the past, I guess where I'm I'm I want to sort of pull you guys with towards is it's been done in a cohesive uh pre-planned way that it was dictated. This time it seems to be, dare I say, like a chainsaw when it requires a scalpel. And that has really injected this huge uncertainty because in the past when tariffs did occur, it was directed as opposed to blanketed. And what we have now is really not tariff. We should change that because when you impose a tariff of 245% I'm sorry that's an embargo because you cannot create a market system when you have a tariff rate at 245. So Michael with that in mind the market is accustomed to being pre-warned and your point is a very valid one. It was pre-warned, but I think the market in its wildest dreams did not expect the theatrics that we've seen where basically penguins are being forced to pay a tariff. Sorry, on their exports. Of course, they're not paying it. Uh, but we are we are paying theoretically a tariff on products produced by penguins. That is if there was any one clue whatsoever that this was just a uh a word salad being thrown out and hoping something would stick. That's probably it. But let's move to the markets. Now the markets have reacted to such uncertainty in an uncertain way or in a predictable way. I think a predictable way. So let me just take them step by step. You said the word theatrics. I think I'll use the word circus. And there's no question in my mind that what is happening is haphazard. Um what do you expect the markets to do in in all sorts of excesses and strange things. You can either go and speak to a behavioral economist or you can ask my children or you can take a guess or you can just say listen I've got to believe that one day you know normal vision will um be restored so I'm going to hang grimly onto the fact that things are going to return to something more normal. you know, hell, I'm teaching a bunch of students. I can't very tell them very much tell them throw everything I'm teaching you in the garbage bin and, you know, just get a dart board and try and take a guess at what tariffs are going to be. But, um, at the end of the day, I'm going to take a punt at what I think's going to happen and what I think is happening. And it's only three things. First of all, the market came from a very, very inflated position. So I'm not 100% sure that the market falling 20% is all to do with tariffs at all. I think it's partly markets just going back to it's a catalyst. Are we going to see things move all over the shop as pronouncement pronouncements change? I think yes. But I'm going to take a punt and say that the end result for tariffs will be very normal in terms of their range. And when I say normal I'm talking about 15 20 25% something like that. So, I'm going to ignore the sideshow and say that's we're going to where we're going to end up. And um the way the markets react to it is actually a bit sad really. And you know, let me give you a stupid example, but I used to work for a superanuation fund where people would join at 23. They'd stay at 57ish or 60 or whatever and they were going to be there for 44 plus years. Yet I was unable to put in place long-term strategies because people would judge you on short-term performance. So this short- termism is one of the symptoms of what I think is wrong as much as the fact that Trump and others are making sure. But the bottom line is if you're asking me what what I'm doing um conventional orthodox wisdom says tariffs will be inflationary. I'm a card carrying member of the club that says tariffs are bad. But I think unfortunately that the way things are happening in the states now is you can virtually guarantee um a recession. Yeah. I mean the key point there is again not that it's tariffs that cause the correction because Michael's point is very valid. Many pundits have forewarned that the valuations of the market are not commensurate with the fundamentals of the time. That there's an abundance of money flowing into the market and the tax structure the way it is is incentivizing people to push their money towards capital gains as opposed to asset gen assets and income generating assets. Be that as it may, from your perspective, Wayne, we talked about and I want to flesh out how the markets have responded under extreme uncertainty and chaos. The worst case scenario is that not only do markets correct, but treasuries correct with it. And if you look at the correlations of this correction visav other corrections in the past 20 or 30 years, what's more visible is the decoupling of the asset pricing as the way we know it where if people panic that you go and you move towards a safe haven and the safe haven typically are treasuries or cash. But this time what we're seeing is actually not common. We're seeing a decoupling from this. Is this something you have also observed, Wayne? And if so, what are your what are you what's keeping you up at night about this? I look I I think hearing I was really interested in what you had to say because I agree with a lot of it. And I and your point of tariffs, the first thing I'd say about tariffs is look, this is the sideshow. every I I read every day what happens overnight as you know reading all my posts on LinkedIn uh it's the sideshow in all this it's it's it's the minutia uh that the the real the real story is here is is that some point in the future there'll end up being trade agreements here and there but I don't know when because and Trump saying that China's talking to him and China saying they're not and Besset not refusing to confirm that Trump had spoken with I mean he's the Treasury Secretary for goodness sake and he could not confirm that Trump had actually spoken to Xi now what does that tell me maybe he hasn't maybe he's just making it up but the whole tariff issue is is I think blown over all proportion in the sense that there has never been a world with free trade free trade in its purest form has never existed and when I studied international economics all those decades ago at the A&U. Uh I'll never forget free trade is only optimal if there's no increasing returns to scale. There used to be this thing called the infant industry argument. And the world is dominated by increasing returns to scale. So there has never been as a free trade world that we've lived in. Right? So all the tariffs are really about is disruption. It's about changing the rules, changing the relativities. And I don't know where we're going to end up, but the real problem that's going on is we've gone from tariffs are just a symbol of having a world of shared interests. Yeah. Why, you know, the shared interests being the fall of the Berlin wall was a pivotal event. It opened up a highly educated in many respects better educated workforce than in west than in the west. You unlocked this massive educated workforce that were cheap. Then China was allowed into WTO. You also then ended up with a with a lowcost perhaps not well educated workforce doing stuff and a and also a very highly educated workforce doing other things. So, you know, that opened up the world. That was great for everyone. But who caused that? Who what was actually driving that? It was companies outsourcing. So, it's companies that made America bad or great depending which way you look at it. And all these tariffs are going to end up being is ultimately a drag on corporate earnings. And there was an article uh I think in the Wall Street Journal on this recently. Um, even though those respected newspapers get discredited these days by the administration, most of what they say is it might be a bit of a bias, but a lot of it's facts based. So, the tariffs are just the sideshow. It's just the theater. What's really going on here um is that when the people that voted for Trump or indeed everyone suddenly realizes that as as is bleeding obvious that the people the Americans are going to be paying the tariffs and Trump could put it off in some super fund and call it something else and point to how big it is that he's taxed all these foreigners but he hasn't taxed the foreigners he's taxed Americans and that's why I think Australia's been very sensible not getting involved involved in a totalitary game. The EU probably has little choice. The I don't know what's going on in the UK, but the U IKEA has worked miracles with Trump so far. So tariffs are not the issue. The issue is every every financial crisis crisis I've witnessed and the first one I was actually in Marcus was the 87 crash which was unlike any other because it was all about a bunch of guys that discovered black shells didn't actually work. Uh and they got off from the commission that said oh it wasn't much volume. But I can assure you that's why 87 was unique. But every other crisis has had triggers that did not necessarily relate to the supposed causes. True. But those triggers were still within the economic norms. Yes. And this one is a radical uh shift out of it. I'm coming to your point. We've had a profit bubble not globally because if you look at the the Australian share market you look at the UK share any developed market share market in the world over the last 10 to 15 years the returns have been roughly you know they've been modest returns overall the market that's given the returns has been the US why because all these big tech companies happen to be there and they're virtual monopolies and and the and you know the tech the the profit bubble John uh authors the the guy that writes for Bloomberg, the Englishman that writes for Bloomberg, he he dubbed this the profit bubble. And so when people were comparing 2000 and I managed money through during 2000 where people were paying hund you 150 multiples of nothing because there was no earnings. They were it was just pure speculation. The the the MAG 7 with the exception of Tesla was actually profit driven. It was like they were making astonishing growth in money. But there's a mathematical problem. Doesn't matter how big you are. If you start compounding 20 30% earnings growth, you can't do it forever. So at some point someone says, "Oh gee, that's disappointing. Earnings, they didn't go up 30%." It's like China's GDP when it falls to 4%. It's devastating. And most Western government to me the real issue is the profit bubble has ended. Yeah. And and and what tariffs are going to do and what this disruption, this chaos to to the business world. How can you plan if there's a tariff one day? Oh, but we're going to put a 90-day moratorium on it. Oh, yesterday it was 2% or 5%. Oh, today it's 20. Uh, I mean, no one can run a business like that. And you know, here at the business school, I hope you would never ever run a business like that. That is the problem. The chaos, it's chaos that's the problem. Absolutely. Not the tariffs. The tariffs are justice. And if I can add to the tariffs thing, you know, back to the Smooth Holly, which I jokingly started on that time that the introduction of the tariffs, which again the president uh uh did not want, it was more a push by Congress, the populist led Smoot and Holly pushed it, but they were protecting an industry. And if you talk to some uh right leaning um pundits they will say well we are bringing back manufacturing into the US economy and tariff is a way to bring it back that the co had uh highlighted the fact that supply disruptions can have runon effect on the overall economy and it's important therefore to motivate corporates to bring back some of the um manufacture ing back home and employ more Americans that you could everything they that they said you could supplement to what was said in Smoot Holly only take out the word manufacturing and replace it with agriculture because in the 1800s agriculture represented around 40% of US GDP by 1930s it was about 5% of GDP or 7% of GDP today manufacturing ing uh is about 7 or 8% of GDP and of that 8% half of that is admin staff marketing lawyers within the manufacturing and even if manufacturing jobs were to come back we all know they would be filled by robots where if I'm not mistaken 60 or 80% of the robots are made by four countries none of which are American even though the technology itself may have come out of how in some Stanley Kubric movie but none nonetheless this is the the disruption of the tariff is what's important more so than tariff itself to add to the point the the I guess the way it was implemented which leads me to my next point and what has this disruption meant because not only has it caused the market to reassess whether or not the stock market is at fair value. As I think you'll hear from the three of us, neither of us, none of us thought the market was a fair value. And we agreed that this the tariff situation was more of a catalyst to bring an uncertainty, which is what the market an overvalued market loads. It causes them to reassess it. And so what's happening now is that there's a dislodgement happening. And getting to the next point, the major dislodgement that's the most damaging to the US and the most uncertain globally is, is the US dollar and our US treasuries still a safe haven? Because if they're not, let's think about this very simplistically. What risk-free formula do you uh form uh uh figure do you use in your present value calculation? What risk-free do I use in CAPM? Whether you like it or not, and to determine what the security market line is, what risk-free do you use in how you value assets in your DCF? I all I was going to say is that um I I think we're I I think we're a long way away from the US not being the reserve currency. We're a long way away from are we? Because we're seeing the Chinese already going to digital R&B. We're seeing the the Europeans talking about introducing an EU debt which is never before seen. It it depends on what you call the long run. Well, it's happening. Well, I I I also think that the the the US Treasury market is the biggest financial market in the world. Yeah. it the issue for the US Treasury market is that it is 80 US Treasury securities in one form or another are 80% of global leverage 80% of global leverage. But is that because they're the collateral sorry they're the collateral backing loads of leverage when people are worried about the collateral value of treasuries there is deleveraging events and we've seen deleveraging already but I I think that it's too early because you know the harsh reality is and this is this again is not a political view Trump won the vote by 2.3 million now forget the electoral college that's competent he only got 3.3 million more votes out of 170 something million votes. Yeah. Um as as the term progresses and he's got to start going through the Congress, uh I think he's going to encounter more difficulties. Um and more importantly, um as the midterms get closer, I think the the sheer competence of the cabinet is is I I watched all of the controversial um uh Senate inquiries into the into the controversial uh cabinet appointments. And these people should never have been appointed. They would never have been appointed in any country in the world. most of them were simply not qualified and so there's a competence issue and I think the competence issue is going to start taking uh is going to start affecting what's happening to markets as well and in in the show yes minister usually the civil servants are the ones who manage on the behalf but you're that point they're being fired they're actually firing them and so there's no one that can relate to that but but Michael if I can turn it to you on this discussion of this apparent dislodgement as an investor yourself, as a CIO yourself, is this causing you to reflect um differently? Absolutely. But let let me answer a few things from the past. What keeps me up at night? Um Liverpool Football Club and the fact that I think there's a real risk that prices go back up from whence they came and then a bunch of people go, "That was all a bad dream. Let's go back to the races." I think that's a very real risk and the last four days are indications that that might happen. If you had have asked me a year ago, did would I ever think the remimi um could be the reserve currency for the world? I would have said not in a million years. Would you ever put your money in a currency where we have a command economy and it's subject to such crazy short-term prognostications? I'd never do anything like that. And that sounds pretty much like what the US is right now. So my thoughts at the moment are that we're seeing a huge anti-America sentiment and it's a loss of confidence. The loss of confidence will ultimately lead to a recession because you just can't plan capex or anything like that. You don't want to fly to America. And what am I doing as an investor? Well, I can already tell you what I've done. I've pulled all bonds and credit out of the United States back to Australia. Partly because I think they look terrible value. Partly because I have absolutely no idea whether American bond rates will go up or down 2% in the near future and partly because I'm just much more comfortable with Australian credit than I am with US credit. And once you hedge back into Aussie, same same. in the in the case of equities much more difficult. I I don't have the guts because of regulation and otherwise to take a huge anti-US trade. But after 12 years of the US winning and all the class have heard me carry on about the U um the S&P 493 which is the S&P 500 less the MAG 7. Pretty much most of the world has made pretty close to donut now for 10 years. Donut means zero. So if we start to see that reverse and year on year now we have seen it. I think that what we're experiencing now is just a loss of confidence in the US economy and investments in the US economy. Will the tech stocks still grow? Maybe, maybe not. But I don't think they'll grow at the level that people expected them to. And I think there's a very real risk that with the US and this change in confidence will find it harder to fund their deficits. They will that means interest rates go up. And now I've got the hard question. You know, when when the tariff talk first came out, I thought, "Oh, this is easy. I've spoken to Rob. I've spoken to Wayne. Um well, you know, tariffs are inflationary." And the bond rate probably dropped 50 bips. It's now pretty much retraced to all that. So anyway, I'm I'm worried about what happens to US bonds. They've got to fund what $9 trillion in the next few months. So I'm just steering clear. But in the absence of having any wonderful idea of what the future holds, I'm just going to stick to buy low, sell high, and right now I think we'll touch on the buy low so high because that is potentially a trap because what we define as low um may be different to what you define as low and what you define as low and what because we're seeing right now there's a lot of buying on dip that's occurring mostly by the retail end, but I'll get to that a little bit later. The the one thing we've got to remember is that there's this thing called the credit cycle and that the world at 1% global levels is not the same world at four. Right? So I see no sign whatsoever absent a global recession or a major market crisis that is going to see rates fall very far from here. Right? I I just can't see it happening. Now, the credit cycle, according to the BIS, who do all this modeling, we we haven't seen the end of it yet. And and I keep saying to people, the financial crisis, the GFC started on the 2nd of July 2007. The proverbial hit the fan in late 2008, but the Nadar of the markets was in March 2009. Yeah, like the credit cycle is out there, which you're right. Why would anyone own credit? They're off their I don't understand it. You're better off owning equities. But that is also in play that's now being hit over the the head with the with the disruption of businesses. But I I really do think that people have to stand back and look at the equity markets. the power of the US retail investor and I see it happening here with if I may say the globally renowned for not being very good ASX and the way that that share investing is promoted as a no lose thing that I find frightening returning to Australia compared to the UK. The things that are allowed to be sold to retail investors in this country could not be sold to retail investors in the United Kingdom under any circumstances. Sure. But think about where markets are. The last time I looked at the S&P, it's up over the year and everyone's going, "We've had this major collapse in equities." No, we haven't. All we've had is an unwind of the Trump trade which was a whole bunch of hedge funds betting on the all the miracle tax cuts and no they were just anticipating what other investors would do. I'm not sure they were all true believers. Sure. But the point is it hasn't gone down that much. True. What has what has been dislodged is again this comfort factor that we the market once had. And you're right, in dislodgement of the Trump trade, it's basically the proverbial has hit the FL fan. But but Michael raised a really good point, particularly for us investors, as as you may know. Um, for most large superuation funds, the international assets, some of those are hedged back to AUD, some aren't. Typically, what's hedged back to AUD, Australian dollar, is the fixed income portfolio. Why? because you know what the coupon payments are going to be and you know what the principle will be when it expires and because equity managers have no idea how to hedge. Sure. Well, aside from that, the what what do you hedge if it's going to change radically? Whereas bond market all things considered tends to be a lower volatile asset class. So therefore easier to hedge. But how can you hedge when the VIX is at this level? when there's uncertainty at this level and the cost of traditional hedging models has gone through the roof the cost of hedging back to AUD surely has to be a prohibitive factor as a currency uh management not against the dollar sorry not against the dollar no I realize that but you know global portfolio is not just US bonds it's also European bonds it's also Japanese bonds etc etc so how how do is Is this basically more reminiscent to Michael's earlier comment that bring it home? I've only got two things to add to that. The first one is hedging costs have risen but not dramatically. And I'm doing it anyway. And pretty much we've lived in a world where for the last 30 years if you just bought the dips you won. And the other thing that you've won handsomely on is just left all of your international equities unhedged. So I think we're about to see that changing. How so? I I I think the Aussie dollar the Aussie dollar has only been at 60 cents or below 8% of the time at 65 cents or below 10% of the time. I think it represents exceptional value and therefore I'm adding Australian dollars to the portfolio which means going from being completely unhedged to let's say 20 or 25% hedged. And I'd say the same thing about the Australian equity market. I mean, it's it's got to be the most boring market in the world. It's got a group of banks. It's got supermarkets. It's got miners. The most expensive bank according to Sun.

That's a different discussion. Yeah. Um uh when it's odd when all the active managers short something, how hard it is for to go down. I think one advice I give all the young people here in markets, markets are driven by flows, not analysis. And so if there's no one left to sell something, it doesn't go down. And likewise, if there's no one left, if there's no one left to buy something, it does go down. And that that's the simple rule you should all bear in mind. It's all about flows. It's not about theories. It's about who's buying and who's selling. So I think the Australian equity market looks fine. Yeah, it'll be all right. You know, I mean, like they'll find new markets. Are you speaking like an equity manager now? No, I'm not. Because as you know the one thing about being a bond manager and and this is I learned bond managers can be both bullish and bearish about their asset class cuz that's how they make money by being either bullish or bearish. You'll never hear I have never and I cannot count the number of equity managers that I I saw uh global equity managers and UK managers in the UK in my 12 years as a consultant but it's well into the hundreds. Um, I have never seen an equity manager tell you that the market will go down and I've only ever heard them when the market does go down that it's a good buying opportunity. So, the last person you listen to as an equity manager, a bond guy will tell you the truth. So, at the moment, equity prices are where they are. Yeah. And bond prices are where they are and one of them's going to be right and the other's not. I'm I'm going to bet on the bond managers. I think me too. Okay. Back on the AU dollar though in the past it's been said that if the US sneezes Australia catches a cold but there appears to be a level of dislodgement of that in as much that initially when the trade liberation day whatever you want to call it began the AUD got hit hard and went from 65 to 60 roughly I I don't know thereabouts give or take a penny It's a 210 with a pound, give or take a penny or or a cent, whatever you want. But now it's the AU the the US dollar is now the one that's plummeting on a twi basis and as a result the AUD is starting to regroup from its lows to your point. is there and you know and when it fell as hard as it had it was punters basically shorting the AUD it appeared to be shorting the AUD because it was the thought at the time was that Chinese manufacturing ergo Australian commodities would decline. So they were making a call on the AUD, not Visav the US dollar, but they were making it visav our one of our largest trading partners in a segment of our economy called commodities. I found that fascinating. I can only explain it thus as I've taught the class often. If you torture the data often enough, you can get whatever answer you want. On April the 4th, the US stock market fell 6%. The Australian dollar fell 6%. Which meant your US shares in $8 terms were unchanged and the only explanation I can give you is that um Australia was perceived as a risky currency and therefore when it the riskoff trade comes it was going down because people were just willy-nilly selling everything. More recently um my data comes from the National Australia Bank. Um there are flows to Rob's point um that are forcing the Australian dollar up and it's got to do with super funds rebalancing because as you know when you look at you know when you know we were always taught balance of trade current account surplus invisibles capital flows all the rest of it well at the moment capital flows um particularly super funds are what determining where the Aussie dollar is short term. So you see the point. So once you see the point there where he was saying that in a dollar terms the offshore equity markets didn't fall. It's because they weren't hedged. But now to your other point that he said earlier if the AUD is structurally undervalued visav the USD uh and perhaps visav v the twi the trade weighted index having offshore assets as the AUD strengthens will be a deterrent. So again potentially another um accolade of bring it home. Again, it's something that uh one needs to ask as we look to rebalance or reassess where our portfolios are visav where the economy appears to be moving towards. Just as someone on currency, I've never professed to be a currency expert, but it was part of my responsibilities and I think at the time I think at the time Aquari funds was probably the largest currency manager in Asia. And the one thing I've learned about currencies is that I mean it currency markets obviously dwarf every other market by multiple factors. Currencies are absolutely driven by flows. And anyone who says I know why the A dollar or the US dollar or the euro or the sterling did this on this particular day. Uh sometimes I might be right, but the best thing is to be skeptical because it's very very hard to to filter out why a currency is doing things because there's so many competing strategies and flows and everything in global financial markets ultimately involves a currency transaction. So the transactions that are going on asset class have currency implications. working out what caused it and reading news reports of why it did this. I just laugh because no one actually knows. And the best advice I give people here if you want to really understand currency markets, there's a fantastic book I think it came out 22 2018. It's called it's by two guys called Lee not related and another guy called Cole Dyron and it's called the rise of carry. best book. It goes through all the history of the Japanese bubble, all the history of recent currencies, the Lou record, all those things. Great reading. It'll change the way you look at currency forever. Conscious of time, I I guess I would like to push ahead a little bit uh before we open up the floor to some of the questions to the students and to the uh professors. Um, it it's obvious from this conversation that we've had, I hope it's obvious at least, that the question is it different this time is more prevalent than perhaps what we are told when we turn on the TV. Why? Because when we're turning on TV and they are interviewing um someone like us, inevitably the question moves towards will the RBA cut rates? Will they continue with cutting rates or not? What we're talking about here is the foundation where 25 or even 50 basis points won't matter. And to the point of of Wayne, which I think is really valid, if anyone assumes that we're going to push rates down to where they were, you're in the wrong industry. You should be a journalist, not an investor. Because to be a journ investor, you need to be more of a futurist. You need to look beyond what's in front of you right here and now. You need to look at the flows. You need to look at the momentum. You need to look at the rules to see if they've been changed. Neither myself nor Wayne nor Michael have given you any definitive view that this is going to happen and this is kind of how it's going to work because neither of us know. No one knows. But I do know this and I think my my friends here will echo this that we are in a shift and if we don't take this shift as real as a real possibility and keep on anchored to the previous norms we are going to be vulnerable to much more volatility than what we see on the TV. Is there anything you would like to add to that Michael? Not at the moment. Thank you. I I think when I when you sent the thing around to us about this time is different, I thought, well, I hope you ask me that. I've studied all the theories. I was an economist. Um uh I had a hor horrific time at A&U learning all the maths. Uh it's still a dark period in my life. Um but the one thing I've learned in my experience as an economist who understands the theories in markets is is is very simple. The one constant, the one thing when people say uh uh you know that this time is different is wrong because it never is and markets mean revert and all that. The one thing that mean reverts in markets is us. The one common factor in every financial market is it's human beings transacting and human beings you know have many flaws but that's why we're probably the dominant species on the planet. We do like to kill each other on a regular basis for no apparent reason or whatever. Um and the behavior of human beings that particularly at the moment the the capacity of human beings to hero worship whether it's pop stars, politicians, uh Elon Musk, whoever it might be operates throughout markets as well. There are true believers and worshippers and people that think that this is and that's what's happened in the US equity markets with all the retail investors. They just refute they every dip they bought every the numbers over the last month or two every single dip US retail investors have bought it. Why they've anchored because during the entire period that those those you know the whole stock trading apps come out where you can get you know five or six different apps and trade them and trade crypto and trade just about everything on your phone. I mean it's like sporting bet you're betting on a rooers game or a camber game. I mean it's it's infected the world right. So that that that's people and that's what makes it the same. And the challenge at the moment is there's a large number and a serious amount of flows out there. They're being driven by people who just don't believe markets can ever go down. And the reason I'm I'm quite bearish on equities but longer term bearish. I I don't know what's going to happen. I'm like you. I mean, anyone who thinks that is kidding themselves. But I think Trump and the policies of the Trump administration are the trigger for causal effects that have been operating for a long period of time. Markets have just assumed that you can't lose money. And sadly, as you rightly pointed out, I think regulators, particularly in Australia at least, seem to be supporting that with the sort of regulations and constraints they're putting on pension funds. I can give you an interesting thing. Having designed a number of Australian superanuation fund strategies, they are designed to only be able to withstand two maximum three years of downturn. Why? because the last 30 years by the dips has worked. Um if you look back and see how long it took for the 1929 peak to be surpassed 27 years. So my hypothesis would be that people are behaving the way that they are because it's worked in the last few years and that's what people without gray hair are used to. um it's possible that the last 30 years are the weird outlier and not the norm. I think what I what I would chime into that because that is a really good point and I'll open up to questions is that's a really really good point is I would ask those who are um amanable to the overall policies of Trump and perhaps perceive uh our questions as politically motivated. I would ask them this as an economist or as a practitioner. Please explain to me the counterintuitive uh one, you have an inflationary tariff policy followed by an inflationary ICE policy of immigration of targeting the farms, targeting the uh uh those jobs that the average American would not do for that kind of salary. um coupled on top of that with a massively fiscal austerity program called Doge. Unprecedented initially, don't forget to uh Musk was saying he was targeting $2 trillion. Then he toned it down to $1 trillion. So let's be generous. Let's say even $500 billion. If we look at history and how many times that has occurred, the last time that we had a major fiscal austerity program, funnily enough, was under Bill Clinton. That doesn't make it right or doesn't make it wrong. The difference is that under that administration, Gore as the vice president, he said, "This is how we're going to do it, and we're going to take four years to get there." The market was prepared and sitting for it as opposed to reading on it on a social media. That is unprecedented. So not only are the fiscal movements of the governments counterproductive and clashing with one another indicative more of theatrics than on fundamental economics. On top of that of course you have this whole system to your point that oh well he knows what he's doing. He's he's not giving me and he's not giving the the market that comfort. He might give a percentage of Americans that comfort, but that 30% of Americans do not control the global markets which influence asset pricings around the world. And that is for that very reason, if I give you no other reason why we must look forward and ask ourselves with humility, is this time different? Thank you.

Thank you very much. Thank you very much. Thank you.