Finance & Fury Podcast

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question is from Raj. "I would love to have an overview of how certain economic factors are interlinked and impact economies: Inflation, Forex rates, Oil prices, Trade imbalances, Fiscal deficit, Money supply, Repo rates, Yield curves and bond prices, Lending rates and Central Bank monetary policy" Big topic – every one of these factors is related in one way or another – both to the economy and to one another The economy is complex – incredibly interconnected and unfortunately for any economist or policy maker – incredibly hard to accurately predict – or accurately theorise about You can have theories about if one factors moves in one direction – it will affect others in another matter But a lot of this is theoretical – purely to it making logical sense based around models that were conducted in an isolated environment – The world and economy isn't an isolated environment – change one input and down the road it is anyone's guess what the 10th order of effect may be That is the core issue of this sort of topic – any individual with specialised knowledge about the economy – whilst they will have more specialised knowledge than the average person – when compared to the economic decisions based around the individual's self-interest – the expert will always fall short For example – I might know more economic knowledge than the next 1,000 people, but if the economy is made up of millions of people – well then their combined specialist knowledge in their own fields and the actions that they will take in turn due to this will result in any number of potential outcomes – ones that an expert cannot predict And like with any complex system – which the economy is – it isn't linear – so for one expert to say that adding $100bn into the economy through increasing the money supply will result in inflation of 1% might be what the theory says – technically isn't possible to accurately predict – so it is anyone's guess For these episodes – we will take a different way of looking at this topic – when most people talk about the economy, they are talking about numbers and statistical measures – for example, how certain metrics affect GDP, or employment, or any range of numbers on a screen – But this isn't the real economy – it is a statistical measurement which is cherry picked – did an episode on this three months ago – called "How accurate are economic statistics and do they really matter in our daily lives?" we are the economy – so to answer the question – will be focusing on the relation to these economic factors and the effect that they have to the individual in the economy Could go through the theory in relation to the economy – for example - that lower interest rates are meant to lead to GDP growth and inflation – but it is proving to not be the case – so looking at the individual level may be a better place to start Now – this is still going to be a generalisation – not every individual will act in the same way – but how they will be affected will be similar – depending on their situation For example - Think it goes without say that if interest rates go down and someone has debt – like a mortgage – their interest repayments will go down But what about someone without debt? That is either looking to get into the property market or has already retired and doesn't have debt? Well – the outcome on them is worse – their savings aren't earning anything and it is likely that the property market just got more expensive if they are trying to get into the market At the aggregate level – taking the sum of all individual decisions- you get the economic output – but each group of individuals will take different actions depending on their financial situation and what is best for them This topic can be broken up into a few chunks – Monetary and Fiscal side – how do things like inflation, money supply, lending rates – which are central banking monetary policy affect the individual in the economy which will be covered today - Then next week - how do things like the Yield curves and bond prices – then government spending as fiscal deficit affect the individual? Real economy side – forex rates, oil prices and trade imbalances – made up of the daily economic interactions within the economy To start with – on the monetary side Inflation – this is one of the factors that affect individual choice – and in turn the economy How does the individual respond to inflation – generally – if it is low – not much of a concern In your own life, do you really notice if inflation of 1-2% is present each year? As long as your income growth or investment/asset growth goes up by more each year – do you really care? Inflation is one of those factors that if it is out of sight – it is out of mind – especially when it is in small increments that aren't noticeable in the short term – obviously when you compare the prices of goods and services today to the 50s there is a massive erosion in t

Welcome to Finance and Fury. This episode is about the story of Dave Portnoy and a warning to any new traders of overleveraging – or even using leverage if you are relatively inexperienced There are Millions of new investors are getting into the market- which is great – but being a new investor will come with growing pains I had plenty of growing pains for the first 5-10 years of investing – from 16 to 26 – learn a lot from mistakes But thankfully – all of those mistakes were isolated losses that were contained Investing is important – but what is more important is to still be an investor in a decade and not end up losing all your investable assets or alternatively, being scarred for life when it comes to investing – and never re-entering the market There are a lot of Online trading brokers that allow leverage – for any new investor that joins there platforms It depends on the market and the trading platform – but the amount of leverage a retail (which is what is considered amateur trader) can obtain is between a 2 to 1 leverage rate to 5 to 1 Means that for every $1,000 that you have, you can get $2,000 of leverage to $5,000 Leverage itself – when done properly – can work very well – if it is done securely and when you do it in a way where you wont be forced to sell the assets But when not – can leave you in a deep hole of debt – where you are left owing more than you might be able to afford An important aspect in using leverage is understanding how to calculate the ratio of a loan to value ratio – or LVR – this is used to understand how exposed you are to downwards movements in the price of the assets when compared to how much you have invested The formula for leverage is: LVR = L/V - where L is leverage or loan size and V is the total value of the asset Very relevant for online trading accounts – as these are an effective margin loan multiplying the margin amount by the leverage ratio will give the asset size of a trader's position Risk and leverage trading - The most important thing to understand when talking about leverage is the risk involved – where it magnifies the risks Risk is inherent to any type of trading – if you buy a single share or even a basket of shares or index – you are exposed to downside risks or volatility risks Have both specific risk or systematic (market) risks – specific relates to the company (management, profits, etc.) – systematic is what we have recently seen – or in the GFC – when the whole market goes down That is where leverage will magnify these risks –leverage can cause both magnified profits and losses however – the risk of these potential losses are magnified depending on the assets that are purchased It is very important for any new investors to try to minimise how much risk they may face – and one way to do this is to try and minimise the amount of leverage they will use Don't get me wrong – say you do take on a leveraged position – double your equity through taking a margin loan of $10,000 on your $10,000 equity – on a one-off basis you could massively benefit if it happen that this one-off trade goes your way But get it wrong and you could end up facing a massive loss – potentially more than you own in the share At this LVR – of 50% with a value of $20k and a loan of $10k – would take a 25% drop in the value of this asset before a margin call may be triggered If a margin call is triggered – you are either forced to pay down the loan, put more money into the share or if you don't have any cash lying around – sell and cut your losses The best way to reduce this risk is to distribute it across different investments and different markets – it is the concept of diversification - meaning you don't put all of your eggs in the one basket If you are going to leverage on a portfolio like this - there is the need to calculate what your potential downside risks may be and to determine things like net asset value that the portfolio may drop to ensure that a margin call isn't likely However - With most margin lending – it is on one security and has one loan attached to it – especially with online brokers – looking at the Leverage on online trading – For some markets – especially for Forex - retail leverage rates can start at around 30:1 - compared to around 5:1 for shares However - leverage rates can also vary depending what type of trader you are, either retail of professional retail leverage rates for forex are around 30:1, they are around 500:1 for professional clients - professional clients must meet criteria in order to be eligible – however – in my experience – this is based around legally mitigating factors for the platform – not the individual – do a quiz, do enough trades, say you are a professional – then you are to them – even though you might not be – you have told the platform you are so the legal onus is on you I think it goes without say that the higher the level of leverage you can access – the greater risk you are at As an example - let's say a trader has a maxi

Welcome to Finance and Fury, the Furious Friday editon. Last week – looked at laissez-faire economic system What laissez-faire should provide – a system of let it be – at the core – a system of relative freedom for the individual – doesn't mean freedom for everything There are still laws in place in society which a government needs to enforce – those of negative rights – where someone doesn't have the right to infringe on you – unless what you are going is against the law – for instance murdering someone Talked in past episodes about the need for governments to have some role – that is to enforce freedom for the individual When talking about the free market – the role of governments would be to not let companies subvert the individual's freedom – or for the financial system to take this over – once a system is taken over – it removes individual inclusion – So in todays episode – we will be looking at what works elements work with a let it be system – that is economic inclusion versus exclusion – What inclusion IMO means is FREEDOM! – the freedom to speak one's mind and try at ventures that are in public demand – as well as economic freedoms Why is it important? Allows improvement, and people to dream of betterment – The idea of inclusion being that everyone gets along and thinks the exact same thing is the antithesis of this principal Language has been changed over time – the concept of a free markets is now seen as extractive – whilst economic policies for social justice legislated by governments is seen as inclusive – but it is an inversion The free market that we have isn't inclusive by its nature – it is exclusive as it isn't truly a free market – You have to get approval in a lot of cases for governments to approve what you are trying to achieve As well as governments having control as to whether you operate or not – this is pretty evident at the moment The political System - Inclusive Vs Extractive systems Needs to be Inclusive - Equality of opportunity – everyone has the same rights Inclusive - Opportunity providing Lack of interference – restrictions (regulations) Barriers to entry, freedoms/opportunity - laws Non-exploitive (Extractive) – shouldn't take from some to give to others What inclusive systems have– what incentivises should be available and what basic tenets does it need to exist? The basic pillars for any system and economy to function properly Property rights – keep what you own Ownership of what you own and purchase, Patents and an incentive to be able to keep what you produce The right to operate and provide a service - Legal system - protect what you have, know deals are honoured Contracts and Borrowing capabilities = TRUST in the system – Economy is confidence Think about the economy – would you trade or transact with anyone without trust? Trust that when you purchase something that you will get it? Be it a service or a good? Trust is two fold - That when you employ someone that they will do their job? Or that as an employee – that when you do your job that you will get paid to do it If there is no confidence that the system is there to protect your rights – rather than infringe upon them – you get into another inversion of the meaning of the legal system Under the modern governmental systems – what is legal is at the states discretion Public services – Well functioning state – but well functioning means that it needs to let us as the population operate Infrastructure – Roads, transport, water, power, etc Goes without say that without power and clean water – society would fall apart pretty quickly – This is where the argument for who provides this can come in – major topic for another day – Whether it be private or public – depends on your POV and mostly political leanings Legal system enforced – but this comes back to the legal system that is in place If the legal system is abusive – or draconian – it all falls apart – It is the difference between a free state and a police state All are needed at once What doesn't work – Extractive systems – Socialism – or very heavily legislated system – it goes on a spectrum Extraction from the productive is a race to the bottom – history repeatedly shows this The more people have to give up of their own time and resources – the less incentives that they have Extractive – the more it is, more people will fight over it. Dictatorships and democracy are both fought over Dictatorships – violent overthrows, for power state has. At least they are public about it, as there is little the public can do to get them out beyond another violent overthrow – rinse and repeat Democracy – politicians rage political wars in a way – the very nature of a lot of promises is extractive – taxation and legislation incentives – They are the thing that makes you want to do things. Example – state run systems – 'they pretend to pay us, so we pretend to work' Property rights – providing people of china with property rights If profits are the purpose of the free market, as t

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question comes from Cameron. "Do you think that negative interest rates will come to Australia?" Today – look at what would trigger a negative interest rate policy (NIRP) – exchange rates, economic conditions like employment or inflation, then debt levels – at the household level The cash rate was cut to a record-low 0.25% in March and has remained there since. The Reserve Bank board insists it will not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the two per cent to three per cent target band. Negative interest rates are a pretty dramatic financial measure to take – But lots of drastic measures have been taken recently – those by governments and central banks to help boost the Australian economy In a quarterly statement on monetary policy the RBA says negative interest rates would be an "extraordinary unlikely" course of action At this stage - the RBA has again signalled it won't be moving to negative interest rates – so for now they are ruling it out – but will they still have this same position moving into the future Current look at the outlook for rates in the short term ASX 30-day interbank cash rate – future implied yield curve - The indicatorcalculates a percentage probability of an RBA interest rate change based on the market determined prices in the ASX 30 Day Interbank Cash Rate Futures – form of financial betting on interest rate movements 25% is the current - RBA decrease would go to 0% Up until Feb 2022 – about 50/50 is what the market expects – In the short term – over the next week – no change – 36% - decrease to 0% is 64% So the market is expecting a decline in the short term- not 100% accurate – it is a best guess based around all the current information – but this information can change Next RBA meeting is the 6th of October – may be a chance that the rates are cut then depending on But the indicators don't point to anything negative at this stage – so what are the probabilities of it going negative Exchange rates The Reserve Bank concedes negative interest rates would be a stimulatory benefit by putting downward pressure on the Australian dollar Covered the exchange rate basics over the last few FF episodes - The RBA believes the Australian dollar is "broadly in line with its fundamentals" This means that they think that there is no need to intervene through moving the interest rates to help the exchange rates However – if the AUD becomes above what they consider to be fair value – they might be more comfortable to move interest rates down to help reduce the exchange rates So at this stage - Under the current circumstances – the current RBA policy approach is probably not going to be reconsidered – so the exchange rate isn't going to be what creates a situation for a NIRP Economic indicators – inflation and employment Employment - It forecasts – in what the RBA calls its baseline case – the unemployment rate will hit a peak of 10 per cent in December, rather than the nine per cent rate predicted three months ago. Stimulus measures at this stage has kept the unemployment figures lower than originally anticipated – the job keeper payments The RBA then expects a gradual easing to seven per cent by December 2022 Employment is one contributor to inflation through – and other factors like GDP GDP growth - RBA also expects economic growth will contract by 6% this year Also expects that the recovery will be slower than previously thought – so GDP growth is slightly lower than the forecasts Expect that Australia's economic growth will take several years to return to the trend path expected before the economic downturn However – this was before the situation in Victoria with the lockdowns – this creates a situation of further reduced growth in the September quarter delay the recovery beyond what was originally forecasted The government expects as much as well - Finance Minister Mathias Cormann said the situation in Victoria was clearly "having a very bad impact on the economy nationally". Outside of Government or RBA forecasts – other economic figures showed the pace of contraction in Australia's services sector and business was slowing in July - but that was before the situation in Victoria emerged – which will lower the forecasts further Looking at other indicators - The Australian Industry Group's Australian performance of services index rose 12.5 points in July This index with a number of above 50 shows economy expanding – currently sitting at an index of 44.0 points - shows that contraction is at play These was some evidence the national economy was stabilising before the Victorian shutdown – but with this occurring – it may slow down the pace of recovery – If it does – and employment doesn't return by as much – RBA may drop rates – but this alone wouldn't be justification to go into the negative territory Inflation - The RBA has

Welcome to Finance and Fury. Today's episode – look at the potential kinds of money what are the best kinds of money are the best for the population In the modern economy - The unprecedented expansion of money supply – created some economic and political consequences is only possible with certain kinds of money Different forms of money – One world currency – digital backed, Fiat currency, Different gold standards Then rate these - Look at their stability, degree of central control and how open they are to abuse - Types of currency – One world digital currency – still technically hypothetical in its implementation Nothing new here – the concept has been around for a while - John Maynard Keynes proposed this – back in 1944 at the Bretton Woods conference – this single world currency was named the "Bancor" At the same time this conference created the International Monetary Fund (IMF) The IMF already has a super-national currency called "Special Drawing Rights" (SDR) made up of a composite of fiat currencies – covered this in past episodes along with the potential for what is being proposed in some circles as the solution to current financial situation - reset of currencies in a digital form If the SDR is the backing – could be a global currency would be digital and controlled by a group like the IMF This would be a cashless society - money would be represented by digits on a screen – more so than what it already is Fiat – money control by government decree Under fiat money – most are on a floating exchange rate – since the peg to gold was removed in 1971 - monetary policy removed a lot of the limits that were imposed on central banks and government spending No longer had to adjust the supply of money in order to maintain the currency's peg to the value of gold money could be printed in order to meet any number of social goods – through Government deficits such as full employment, stimulation of the economy and government spendingBottom of Form Result has been for fiat currencies to be inflated – so in real terms they are worth a fraction of their purchasing power in 1971 Since 1971 was also the year workers' wages in real terms have been growing slowly – especially in countries like the US and EU GDP growth has been sluggish compared to the prosperity enjoyed during the 19thand early 20th century classical gold standard era Result has been for hard asset prices like property to also be inflated A lot of this came from the inflation targets – where there has been a justifiable reason – especially currently need for central banks to inject new money supply ever increasing amounts simply to prevent default on unsustainable debt levels can be seen as the logical outcome of the fiat money experiment. Historically governments have seldom been able to resist the temptation to print more fiat money Types of gold standards - Historically it was used as a means of exchange – in form of coinage for several thousand years – but physical gold as money had two major downsides – it is heavy and hard to carry around – also have to try and store it and puts you at risk of having it robbed also - the demand for money through most of history was many times greater than the amount of gold available Using physical gold would cap capacity for economies if it were the sole means of exchange - Hence the invention of money backed by gold - Government gold standard During the classical gold standard eras – depending on the nation it did differ – but through most of the 18th, 19thand early 20th centuries the way governments pegged their currencies to gold was through the control of supply – if your currency was in demand – can produce more of it – and if not – cease creating new money until the amount of money came back to be in line with the gold reserves of the nation This stability is not perfect but it is better than any other option that humans have come up with to date – due to the fact that gold can keeps a stable value (due to limited supply and it doesn't rot away) So money pegged to the value of gold also takes on this stability - This is what is meant by a gold standard – money whose value is pegged to the value of gold. It also had a built-in way for a currency to maintain the peg to the price of gold – through the conversion of gold to money and money to gold Say that a nations currency was weakening relative to the official peg to gold - for example in the US the peg was first set at $20.67 up until 1934 at $35 an ounce – people would go to the bank to buy gold with their dollars as they would make a small profit. The bank would sell the gold and retire the dollars from circulation. This reduction in supply would continue until the demand for dollars would again raise their value to the official peg with gold. If the opposite was the case and the dollar became overvalued relative to gold then people would take their gold to the bank and exchange it for dollars in order to make the small profit. The bank would buy the gold

Welcome to Finance and Fury, the Furious Friday edition. Today, we are going to go through the concept of Planning versus chaos within an economic system Before we get into it - Which one would you prefer – purely based around the description – an economic system that is fully planned or one that is based around chaos – albeit self-organising chaos? That is where Fully planned does sound better – in theory – you should have lower uncertainty – through have some entity creating all the rules of commerce, from the amounts of goods to produce and at what price, how many people should be employed and at what wage – creates the perception of safety - but in reality – is this what actually occurs? On the other hand – when looking at Chaos - could this actually lead to a better result for you and I? Well – based around what has been observable throughout history – it is – as chaos when left to its own devises becomes self-organised It does sound weird – letting an economic system fall into complete chaos But chaos here isn't what the end result is – the end result is closer to an optimal solution for everyone This is due to the complex systems of the economy – The very nature of planning in chaos makes planning obsolete - the property of a complex system is one where the behaviour is so unpredictable as to appear random – and this system has a great sensitivity to small changes in conditions –trying to control the whole system ends up on true chaos as the outcome So in this episode – we will look at how planning of the economy is what creates true chaos – of complete disorder and confusion – whilst a system of chaos that is allowed to self organise can result in the best outcome for all of us This is the concept of a free market – the self-organisation of the population without intervention To start with – important to cover the concept of laissez faire – French for let it be – This is an economic theory in which transactions between private parties are absent of any form of economic interventionism such as regulation and subsidies laissez-faire is a theory that rests on the concept that the individual is the basic unit in society and has a natural right to freedom and that the physical order of nature is a harmonious and self-regulating system This theory was a product of the Enlightenment period – and was conceived as the way to unleash human potential through the restoration of a natural system, a system unhindered by the restrictions of government". Remember – prior to this time – 1700s – the rule of the economy was done by a Monarchy in most nations – Quotas were set, taxation was required – it was a very controlled economic system where the state would provide monopoly contracts to companies and allow them to facilitate trade without competition – as it benefited the state (i.e. the royals in control) The by-product was the rise of mega-companies like the Dutch East India Company, French East India Company, the East India Company and their likes – if someone wanted to create a company – needed a government (essentially a royal) charter to do so – this system wasn't natural – heavily monopolies and controlled by the monarchs of the time – however it made those within a system of nepotism incredibly rich – both the royals from receiving direct tribune from these companies and the heads of these companies (or shareholders) Then the world saw a rise in the de-monopolisation of the economic system – over time – smaller entrepreneurs started to appear Laissez-faire as a concept in markets started being practiced in the mid-18th century and was further popularized by Adam Smith's book The Wealth of Nations – concept of the invisible hand Adam Smith's viewed the economy was more of that of a natural system - where the market was an organic part of that system – which at the core is human interaction By extension - Smith saw laissez-faire as a form of a moral program and the markets as an instrument to ensure people the rights of natural law - the positive rights or law of any given political order, society or nation-state – to not be infringed upon Therefore - free markets became a reflection of the natural system of liberty and freedom for the population to conduct their lives and earn a living as they saw fit - For Smith, laissez-faire was "a program for the abolition of laws constraining the market, a program for the restoration of order and for the activation of potential growth" Through millions of people interacting through voluntary transactions – the prices and supply of goods and services will form an equilibrium close to optimal over time If all of a sudden everyone is demanding tea – people will start producing or importing tea – eventually there will be competition and due to oversupply – the price will drop to allow additional demand of tea – eventually – the market will be flooded with tea – as opposed to the early day of mercantilism where only the wealthy could afford to drink tea – as was the case i

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question is from Martin. Paraphrasing the question – but the crux of it is - What is happening in the property market and will property prices decline from here or were the original bank forecasts overestimated? Great question – Today What is going on in the property market – Did an episode a few months back covering the economic forecasts – went through worst and best cases – said that it wouldn't be the worst – probably some where in the middle – so where does the market currently stand To start with – looking back on the Aus house price index – was growing strongly since the late 90s – had ups and downs along the way – but on average – the prices have mostly moved sideways over the past 3 years - rising or falling by around 10% per year across major cities like Syd and Melb Back in 2018 when prices started to fall – not much to be concerned about - affordability remained strong, unemployment was low and interest rates had room to fall Today's landscape is different - Unemployment is now at a 20-year high, immigration is non-existent and interest rates have hit the lower bound However - current housing figures have been resilient given the circumstances – On average - house prices have fallen by about 1% over the past three months – all occurring through some of the worst economic conditions Australia has seen in the past 70 years Short Term indicators – showing forwards price estimates Auction clearance rates - indicator of sentiment – if it is high – people are snapping up property in a competitive market When the Australian economy was in total lockdown during April 2020 - clearance rates dropped heavily but since have recovered into the mid-60% range – Victoria being the outlier – being much lower Mortgage finance - The level of mortgage finance going through the economy reflects the volume of borrowing – this has been historically a major driver of property price movements – the most recent data point is from May – so lagging behind – however – this was highly impacted by the lockdowns showed some of the largest declines in finance of the past 20 years – due to banks lending around uncertainty of individuals and their employment Price estimates - pointing to be slightly negative year-on-year for 2020 - potentially in the 5 to 10% per cent range over the next 12 months Building permits for new homes – the new supply of properties - indicator typically moves in the same manner as house prices recent figures for building permits show there's been a quick decline in the intention to build – might show expectations that sales will be lower in the near future Properties listed for sale – supply of existing properties – Even though buyers are returning to the market, overall the number of properties listed for sale is down between 22% to 16% on average over the last 12 months The lack of good properties for sale at a time when there are still many interested buyers, is one of the reasons our property prices have, in general, held up in the current economic conditions - Around major cities – there still exists buyers – especially if people have been able to get $40k out of super and get the first home owner grants – lots of new available funds In total for the forward indicators - In the short term – if the number of sales returns to normal - house prices may decline on average by a further 5 to 10% Longer term – looking at the big picture of property price drivers On average - Australian has done well for a few reasons – and people can still justify it even though it is the some of the most expensive in the world we have strong migration, good affordability due to lowering interest rates and constricted supply based around desired places to live – 1 of 5 major cities – so how does this hold up in the current climate Unemployment – one of the larger risks to the property market at this stage – due to Australia faces a historic level of job losses Gone through unemployment stats in the past and how they are calculated – however - 3.5% to 4% of the working-age population lost their jobs since March – 700,000 jobs and is two times larger than that seen in the early 1990s recession and four times larger than the 2008 recession this stat does not include those who are currently on the JobKeeper program which is around 3 million people All of this has brought about economic hardship for many households – which created a situation where banks brought in loan deferrals – or bank holidays - almost 500,000 borrowers have been granted loan deferrals About 1 in 5 of these – or 100,000 are considered to be in deep stress APRA states that deferrals across home loans account for about 10% of all loans These bank holidays were originally given for 6 months – but each application will be renewed in September – with the ability to continual the deferral process for another 6 months – until March 2021 But this can only be applied – APRA stated "Where the

Welcome to Finance and Fury. Last Monday – talked about exchange rate basics Summary - There are a number of factors that go into analysis of the fundamental health of economies and the implications for currency movements – and in turn these can affect the exchange rates – Went through indicators that show the flows and trends of supply and demand - like the balance of payments (capital and current accounts) and the level of foreign reserves a country has – including economic indicators like inflation, interest rates, GPD – all go towards affecting the exchange rate movements – but these are only at a cross currency level when looking at say the AUD to USD Today – Look at some of the reasons behind movements of AUD to USD Major things to look at: Central bank policy – interest rates, inflation expectations – influence trading behaviours Trading positions – what professionals are betting on The trade markets – current account and capital accounts – historical data No way to accurately predict the movements minute to minute – reading tea leaves – so what do the leaves say Starting with central bank policy - The AUD/USD exchange rate has been retracing some of its decline - However – a small Reversal of this trend started following the Federal Open Market Committee (FOMC) Minutes being published - The Federal Open Market Committee- group within the Federal Reserve System responsible for overseeing the nation's open market operations - makes key decisions about interest rates and the growth of the United States money supply Shows the power of central bankers over currency – even based around their statements (not actions) currency exchange rates can move - AUD/USD pulled back from a fresh 2020 high of 0.7276 – this was due to that in the FOMC Minutes – the Fed foreshadowed a change in the monetary policy outlook- said they would employ an outcome-based approach versus a calendar-based forward guidance Under 'calendar-based guidance', the central bank makes an explicit commitment not to increase interest rates until a certain point in time. Under 'state-based guidance' or outcome-based approach the central bank says that it will not increase interest rates until specific economic conditions are met. Feds reasoning - "a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point." – but not at this stage Forward guidance is what markets respond to here – what central banks are pointing at for the decisions So the current market conditions may keep the exchange rate afloat as the crowding behaviour in the US Dollar looks poised to persist over the remainder of the month However, it seems as though the FOMC is in no rush to alter the course for monetary policy the committee vows to "increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace," Chairman Jerome Powell said that they will stick to the status quo at the next interest rate decision on September 16 as the central bank extends its lending facilities through the end of the year Back with Australia - At the same time, the Reserve Bank of Australia (RBA) Minutes suggest Governor Philip Lowe will also retain the current policy at the next meeting on September 1 as "the downturn in the first half of the year had been smaller than predicted," and the central bank may carry out a wait-and-see approach throughout the remainder of the year – so they have a outcome/state based approach as well The RBA is waiting for the likely effects now that the government's fiscal stimulus programs like the Jobkeeper Payment have been extended for a further six-months. Looking at the interest rates - the RBA may continue to rule out a negative interest rate policy (NIRP) for Australia as "members agreed that the Bank's policy package was continuing to work broadly as expected," the limited scope for additional monetary stimulus may provide a backstop for AUD/USD as the FOMC shows little intentions of scaling back its non-standard measures in 2020. As a result, the Australian Dollar may continue to outperform its US counterpart as AUD/USD approaches the 2019 high (0.7295) – now the currency is above this – gone to 0.7366 and current market conditions may keep the exchange rate afloat as the crowding behaviour in the Greenback looks poised to persist for a little while yet – Everyone was jumping into safe investments – either USD or USD backed securities like treasuries – look at this late with the capital account RBA Governor Phillipe Lowe stated that "The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930's. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia". When looking at the Aus interest rates - At the last RBA rate decision on August 4, officials c

Welcome to Finance and Fury, the Furious Friday edition, where we will continue to look at some derivative disasters. Last week – went through some of the basics – and a few Australian specific examples - In todays episode – want to look at the Long Term Capital Management crash in the late 1990s Similar to some of the cases last week – wouldn't be surprised if you haven't heard of this – but it had the potential to spark a larger crisis – The story is very similar to the GFC- almost like a mini-or pre GFC – and an event that likely created the moral hazard that lead to the GFC - so what happened Long Term Capital Management (LTCM) – they were a major US hedge fund – used absolute return trading strategies Now - hedge funds are normally defined as absolute returns funds – as the name sort of indicates – they aim to get absolute (or positive) returns over a rolling period regardless of market conditions – So a traditional asset managers or long only fund tried to outperform a benchmark or index year on year – which can result in a loss – but if the ASX or S&P500 are down by 20% and the traditional manager is down by 15% - done their job However – an absolute return manager would want to get a positive return in this year Hence- hedge fund managers employ different strategies in order to produce a positive return regardless of the direction of asset markets. To do this – they can use a range of strategies - like short selling, or using leverage and high turnover in their portfolios – but also – using derivatives to hedge their positions – but also – to trade traditionally boring (low loss potential assets) like bonds using derivatives Long Term Capital Management was run by some pretty big players – Launched in 1994 by former Salomon Brothers bond trader John Meriwether Salomon brothers was famous from the early days – if anyone has seen and remembers the big short movie – the individual who pioneered MBS was from Salomon Brothers – Lewis Ranieri John Meriwether headed Salomon Brothers' bond arbitrage desk until he resigned in 1991 amid a trading scandal. According to Chi-fu Huang, later a Principal at LTCM, the bond arbitrage group was responsible for 80–100% of Salomon's global total earnings from the late 1980s until the early 1990s LTCM was also run by PhD holders, two Nobel Prize winners on their works in option pricing models and a plethora of finance veterans One of the PhDs was Myron Scholes – the Black Scholes pricing model is the gold standard used when pricing especially European option – that's contract that limits execution to its expiration date – as opposed to American which can be executed at any time prior to maturity trades were conducted through a partnership with Bear Stearns and client relations were handled by Merrill Lynch – so it had very little overhead They launched a bond trading hedge fund using option pricing – and they did very well initially – from their launch they had $1.25 billion under management This quickly grew to $100bn in just under 3 years – they were attracting massive inflows due to their annual returns - return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year Given the strategy was promoted as being absolute return – low risk/high reward form using bonds of all things – gained a lot of attention The trading strategy – put simply – it was to buy or sell bonds when prices deviated from the norm using borrowed funds and additional leverage - often in the form of derivatives - then wait for prices to converge again to make a profit known as involving convergence trading – official definition is to "use quantitative models to exploit deviations from fair value in the relationships between liquid securities across nations and asset classes" The type of investments were on US Treasuries, Japanese, UK and Italian Government Bonds, and Latin American debt, although their activities were not confined to these markets or to government bonds – which we will come back to At the core – this strategy is known as fixed income arbitrage – How this works - Fixed income securities pay a set of coupons at specified dates in the future –a bond can pay semi-annual or annual coupons to the debt holders – they also have a defined redemption payment at maturity – normally the Face value of a bond Since bonds of similar maturities and credit quality (or risk of default) can be seen as close substitutes to one another – there tends to be a close relationship between their prices (and yields) Think about Australian bonds issued – all with FVs of $100 – if the coupons on these are the same at $3 p.a. – so they should all be priced in similar manners – assuming their maturity dates are the same – however – if their maturities are different or they pay different coupons – relative to the interest rate their prices will be different But – depending on the liquidity of the market – or how easily you can sell the bond – these same or similar bonds can have

Welcome to Finance and Fury, the Say What Wednesday edition. This episode is a bit of a special episode –looking at some legislation in Australia that is currently underway – Has to do with the Government stepping in for the Monetisation of the news – which could ultimately mean the consolidation and control by legacy media of the information that you receive Might have, or may not have heard about this new bill that is going through parliament - likely to pass in Australia in the next week – called the News Media Bargaining Code On the 20 April 2020 - the Australian Government announced that it had directed the ACCC to develop a mandatory code of conduct to address bargaining power imbalances between Australian news media businesses and digital platforms – like Google (youtube) and Facebook What the ACCC says – "the production and dissemination of news provides broad benefits to society beyond those individuals who consume it. The proposed bargaining code is intended to address bargaining power imbalances between Australian news media businesses and digital platforms in order to ensure that commercial arrangements between these parties do not undermine the ability and incentives for news media businesses to produce news for Australians." But is this what is really going on? If it were just about monetary arrangement in bargaining powers – why does this bill propose that the media outlets should also get backdoors into the algorithmic curation of news on these platforms and advance notification of algorithm changes – as well as potential access to users data This bargaining code is being developed by the Australian Competition and Consumer Commission (ACCC) in close consultation with the Department of the Treasury (Treasury), and the Department of Infrastructure, Transport, Regional Development and Communications (DITRDC) Digital platform services to be covered – major ones being Facebook and Google (including YouTube) – where most people get their news – but the code suggest that these platforms have become unavoidable trading partners with Australian news media businesses Hence – they see that there is an imbalance in bargaining power – Channel 9 or the ABC creates the news and it gets viewed through youtube or FB – However, the ACCC intends for the code to include mechanisms to allow the addition of other digital platform services – anywhere that news is viewed – Accelerated Mobile Pages (AMPs), Android TV, Instagram and WhatsApp (owned by Facebook) I want to be clear – when talking about these mega companies – like Google (Youtube) or Facebook – I'm not a massive fan – is a private company that already promotes what they want – they have monopoly and act as such - This bill on the surface would start playing the Smallest violin in response to googles outcries – but is there more to the story At the surface – Google and FB should be legislated for the anti-competitive behaviours – but they are the biggest donors to both sides of the political isle in the USA – so nothing will happen – They also have platform rules whilst taking publisher rights – to oversimplify these laws - Platforms – are immune for being sued as they simply Publishers – curate the content – through editors – However Don't get me wrong – Youtube can be a great tool – waste hours watching cat videos or watching lectures on economics or history – choice is up to the individual However – they have been taking advantage of a weird grey area – which isn't a level playing field to media companies in the first place – however media businesses have been the beneficiaries to these practices That is where the next section of the legislation states – "Value of news to digital platforms" – where the availability of news on each of Google and Facebook (as extracts of, hyperlinks to, and/or full reproductions of, news content) provides value to these platforms in the form of: direct value: revenues from advertising displayed within or adjacent to the news content on the digital platform's services (direct revenue), and indirect value: the value of the increased use of the digital platform's services by users attracted or retained by the availability of news content, which may include: increased advertising revenue generated by the digital platform's services collection of additional user data that can be used to improve the digital platform's ad targeting across all of its advertiser-facing services collection of additional user data that can be used to improve the user experience across all of the digital platform's consumer-facing services. I would say that media and these digital platforms have been helping to fuel one another – not to act like the media is slumming it from youtube or from google which sends people to news article sites – On both media generates ad revenue – from Youtube alone they generated $10m last year in ad revenue But now in Aus – the media could potentially do so as well The major parts of the bill – 3 – additional revenue

Welcome to Finance and Fury. I've seen news about the AUD being at a 15-month high Today – wanted to do an episode on exchange rates and look at some of the fundamental driving factors in the price movements – next week put this together and look at the current trend and factors behind it In the modern financial world – most exchanges are floating exchange rates (excluding some nations – like china that have a semi pegged currency to the USD – or others that just use it outright) What are floating exchange rates - A floating exchange rate refers to a currency where the price is determined by supply and demand factors relative to other currencies These are traded on foreign exchange markets – or called forex for short - allow for 24/7 trading in currency pairs – actually the world's largest and most liquid asset market But it is the largest traded market in the world – only a relatively small number of currency pairs are responsible for the majority of volume and activity – essentially 20 – As of 2019 numbers with countries ranked in volume – US no 1 with 44%, EU no 2 with 16%, Yen – 8.5%, Pound with 6.5%, AUD number 5 with 3.5% - top 5 close to 80% In this market - Currencies are traded against one another as pairs – for example – when people talk about the AUD being at its 15 month high - against what? Well the reserve currency -USD – but what about other currencies Can have the USD/EUR, YEN/Frank - each pair is typically quoted in what is called pips (percentage in points) out to four decimal places While AUS to USD has gone to its 15 month high - return over the past 12 months has been 6% - against other currencies we are at a lower point – example – compared to the pound – down by about 0.71% over 12 months – Euro – about the same – 0.12% up over 12 months What does this say? Is it that the AUD is becoming more in demand, or the USD less – That is where it gets more complicated – as the movement of these pares is relevant to the factors that affect the price of each currency How are the prices of these cross pairs affected – supply and demand of each currency The AUD might have more supply, or less demand compared to the USD – so the cross-currency pair gets pushed down in price Or when the world demands more US dollars - the value of the dollar increases and when there are too many dollars circulating without the demand to soak it up - the price drops It sounds relatively simple - But What affects supply and demand – A whole range of factors - Currency prices can fluctuate based on the economic situation of each individual country involved in the pair – including things like geopolitical risk and instability, trade & financial flows, among other factors – These are some major indicators of the state of supply and demand that can be looked at - Balance of payments – flows of foreign exchange – The balance of payments is a country's record of currency transactions across national borders – essentially payment data that comes out on a monthly or quarterly basis by a country's central bank The data is customarily divided into two main components: the current account, and the capital and financial account Current account – The current account balance measures the commercial transactions of goods and services It also includes any net foreign investment earnings and net international transfers of cash It is a representation of a national foreign trade balance showing total imports and exports- which is the net exchange of cross-border services Can include any import/export market – goods purchased, travel & tourism, payments for international shipments and transportation in a general - the flow of foreign trade is considered a key component of the current account balance - a country that is importing more than it exports from month-to-month will have a widening deficit on their current account The trend toward a current account deficit is considered an indication that foreign money is flowing out of a country and that a currency will likely weaken over time So if a country is a major importer from another nation – with everything else being equal (supply of money and no other trade partners) – then their currency will likely decline Capital Account – which is the other major component of the balance of payments basically a register of investments flowing in and out of a country - include direct investments and portfolio investments Direct investments - investments made in physical capital – can be real estate and property – natural resources - production facilities like factories, and machines and equipment Portfolio investment - investment in financial assets - like shares and government or corporate debt falls into categories of short- and long-term investment – referred to as "hot-money" This can increase the volatility of a currency – especially liquid investments like shares – imagine if the majority of the balance of payments was in shares – then foreign investors dump these shares – that is a lot of AU

Welcome to Finance and Fury, the Furious Friday edition. This episode – will be looking at derivative disasters through in the history – looking at specific crashes of near financial disasters – that were contained Specifically – Look at a few examples in Australia –ones that most people wouldn't have heard about – been studying derivatives and the legislative side to them over the past few weeks – came across cases that I had never heard of – wanted to share this and help to demonstrate how these instruments when misused can create a fragile financial system To start with - Financial derivatives are powerful instruments Mainly because of their capacity to operate with a high degree of leverage -Therefore a small change in underlying prices of the assets that they are written on can lead to dramatic profits – but also losses Due to counter party risks – i.e. the other person that you enter these contracts into with – ones gains can be another loss – and when the loss comes due – the counter party can come knocking – but this is a simple bilateral arrangement – gets more complicated when these are millions of contracts spread between just a few providers I'm sure that a lot of people listening would have heard of Warren opinion of financial derivatives – that they are financial weapons of mass destruction However – the irony is that in the BH annual report to shareholders the same year that this statement was uttered - the firm disclosed that they used derivatives to execute some investment strategies – these actions illustrate the usefulness of derivatives to hedging and arbitrage operations The spread of these instruments means that they will continue to be accepted and used both by financial experts and consumers – no getting rid of them Have been around for a while - Derivative history – first created in In September 1987 – there was a collapse in most major share indices Within hours of this crash, international emergency meetings had been convened by Alan Greenspan introducing a "solution" - The creation of a new instrument – this was called a "Creative financial instruments" but otherwise known as "derivatives" today - Came up with the derivative instruments as a concept and further increased the risk to the financial system Looking at these Derivative disasters in context – what similar elements they have Important to run through – as before we discuss specific derivatives disasters – need to recognise that each of these issues in the context of a broader range of financial disasters do have similar elements No shortage in financial disasters – they have a long history – many different causes linked to a wide range of stemming issues – for instance - changes in financial climates – downfalls of empires – systemic banking crises fuelled by overleverage - as well as human error, negligence and fraud Now - derivatives do not the pure cause of financial disasters - but their characteristics of leverage and structural opaqueness in pricing, means that they add an element to a normal financial crash – in that they accelerate and eventuate the existing risks that are inherent in the fragility of any economy and financial markets That is the common element of derivatives disaster – they increase the risks of downturns happening and amplify the level of those downturns The profile of derivatives disasters cuts across all types of users, including banks, public companies and even government agencies Most of these stem from banking institutions - they are the champions (and sellers) of derivatives – and are therefore not immune to error - or negligence and fraud in selling and managing these derivative products –some of these downturns were purely due to one rouge trader – shows the power of these instruments when misused – however – things become far more risky when the whole industry is swept up in the perception of easy gains and everyone jumps on the same bandwagon – fuelled by competition and greed Disasters occur when there are failed attempts at the three major area that derivatives are used – Hedging, Arbitrage and Speculating – most obvious for risk taking The other common element of derivatives disasters – the Major issue that predicting financial downturns face is due to the range and breadth of these instruments – hence - disasters are not restricted to any one asset class or commodity there is a wide cross-section of asset class derivatives - including foreign exchange, interest rates, commodities, bonds, housing, mortgage and equity derivatives There are no cultural or geographical biases in derivatives disasters. They can combust anywhere and at any time when not treated with care This creates a stem of counter party risks – the spread of risks through the whole system Think about shares – bubbles are contained to shares – easier to spot – but the derivative markets are all encompassing on all assets Looking at one of the first cases in history of derivatives loses – Occurred in Australia in 1987

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question comes from Douglas: "Long time listener of your Podcast and it has great insights and thought-provoking ideas. Can you dive deeper in to who are the beneficiaries of the Future Fund from and what the unfunded superannuation liabilities means and list who besides politicians this fund does benefit?" Douglas brought up a good point – that the commonwealth unfunded liabilities don't just go towards politicians which was the main focus of the episode two weeks ago – has requested deeper dive into who gets paid from the Future Fund - Commonwealth Super Liabilities Today's episode – look at the Commonwealth unfunded liabilities – and the beneficiary funds Unfunded liabilities - Related to the gross debt that the Australian Government holds on behalf of unfunded superannuation liabilities – Essentially – how much money is owed but isn't there ready to be made available for payment This comes form a special type of account called Defined Benefits To start with – you have the Funding types of superannuation accounts – Fully funded – what most people would be familiar with - a superannuation scheme in which the employer contribution to the fund (or the employees contribution) is the same as their entitlement – Essentially – what is being contributed into the fund is sufficient to ensure that the assets of the fund cover the actual value of what the members are entitled to – this type of account is typically referred to as an accumulation scheme – where you have contributions that are accruing values Unfunded — a superannuation scheme in which the employer makes no contribution to the fund – nothing is sitting there but yet people are entitled to an allocation of funds Occurs for government works or defence workers Funding is provided only as required for payments to retiring employees – this is how defined benefit schemes with the government operate Defined benefit schemes — a superannuation scheme in which the retirement benefit to employees is specifically defined – set based around a notional calculation – or formula – usually based on a formula in terms of years of service with the employer (or years of membership of the fund) and average salary level over the few years before retirement a defined benefit super scheme - meaning your Super benefit is defined in advance by a set formula. This formula is based on: Your contribution rate, Your final average salary (FAS), Your length of PSS membership Calculated on a notional formula – each year the balance is calculated to increase while you remain employed Technically - (for defined benefit schemes) can be fully funded – but I believe QSuper (which closed down their DB accounts to new members – and many Unisuper as well – are funded – or partially funded defined benefit schemes – as they have a duty of being fiscally responsible as trustees Many different types of defined benefit accounts that the tax payer was on the hook for with these unfunded liabilities – These are managed by the Commonwealth Superannuation Corporation (CSC) now – CSC was established on 1 July 2011 as trustee of government related superannuation entitles - Types of DB schemes – or unfunded liabilities the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS) However - the Commonwealth Superannuation Scheme and ­Public Sector Superannuation Scheme closed to new members in 1990 and 2005 respectively Then you have the Military Superannuation and Benefits Scheme (MSBS) - MilitarySuper closed to new ADF entrants on 30 June 2016 Both have transferred to accumulation type accounts since then Beyond this - CSC administers five other 'unfunded' superannuation schemes: the Defence Forces Retirement Benefits Scheme (DFRB) - closed to new members on 30 September 1972 the Defence Force Retirement and Death Benefits Scheme (DFRDB) - closed to new members on 30 September 1991 the Defence Force (Superannuation) (Productivity Benefit) Scheme (DFSPB), the 1922 Scheme – closed but replaced by CSS and PSS on 1 July 1976 the Papua New Guinea Scheme (PNG) - closed public sector scheme with no contributing members Essentially – these have all been closed for a while - the number of members should fall over time – all closed and replaced with accumulation (or fully funded accounts) Over the past few decades – this unfunded liability has become one of the largest government debts held are the unfunded public-sector superannuation liabilities. All arising from legacy defined benefit superannuation funds where the government holds back on making contributions and only meets the liability when the benefits are paid. Effectively, the bill is passed onto future generations to be paid and future governments to deal with most of these funds were closed in the last 25 years (some quite recently) so the number of people with defined benefit entitlements reduces every year. However, the value of liabilities has

Welcome to Finance and Fury. Today's episode – how to build a framework for decision making – for investments or wealth building strategies Not one set way to make a decision – everyone is different – everyone has different situations – people make decisions in different ways – Emotional decision making – some people just go with their gut – Logic/formula-based decision making – following a framework on what to do both have their pros and cons – the first one enables you to take actions quicker in some cases – very useful for decisions using heuristics - If we make too many decisions in a day – eventually get decision fatigue Which is the deteriorating quality of decisions made by an individual after a long session of decision making Not all decisions are made equal - what to have for dinner is different to decisions like which investment strategy to follow – or which investments are correct So when making smaller or non-important decisions – normally go with heuristics – not getting too bogged down in logic and researching every option can lead to information overload – and decision fatigue However – if you are making more important decisions – helps to have a framework – This is how I go about it – not one right way – but if you don't have a framework – can use this as a base to build your own to help take actions and make decisions First step – goals – knowing what you want to have is the first step in on how to make the decisions to get it Setting financial goals is important – have to know what you want to make a decision on it For finances – need to have what you want to achieve – Example – what passive income you want – when you want it by – why you want it – Or – buying your first home – how much you will need to spend based on where you want to live – allows you to narrow your decisions down and make one that will serve your interests In setting the goals – Have a workbook on the website in the free members section But you need to define your goals SMART S – specific – what, why, who M – measurable – how much A – achievable - needs to be realistic and attainable to be successful R – relevant – has to align to what you really want - T – Time – when you want it by and the timeline that you have Time is also important as it helps in deciding how much time to make available for the decision-making process Also allows you to help to consider other factors, like: How much time is available to spend on this decision? Is there a deadline for making a decision and what are the consequences of missing this deadline? Is there an advantage in making a quick decision? How important is it to make a decision? How important is it that the decision is right? Will spending more time improve the quality of the decision? All of these are important factors to consider for each goal – but important not to get too bogged down here as this stage can delay decision making – you might have 6 months to make a decision but why wait? Like procrastinating and doing an assignment last minute Time is also important in planning - when you want to achieve you goals by is almost as important as what you want – allows you to narrow down decisions Financial decisions differ in time horizons – likely to make decisions every day with finances Every purchase and transaction made is technically a financial decision – but longer timeframes do allows for some error in decisions Second step – getting a list of your goals together – prioritise and decide who is responsible for making the decision If you are working as a family or couple – important to understand if it is a joint decision – or if one person is to take the lead This idea of responsibility allows for someone to take charge with the other steps - Responsibility for decision - Before proceeding any further you need to be clear who is going to take responsibility for it Also – need to decide on when the decision needs to be made for each goal here – based around priorities For some situations - sometimes a quick decision is more important than 'the right' decision, and that at other times, the reverse is true – actions are more important than theory or knowledge on a subject For what to have for dinner – or what clothes to wear that day – quick decisions are probably best – otherwise may go hungry or be late – For others – like setting an investment strategy – can be a very important decision – Another factor – there may be more than one goal that you have – with finite resources Setting a list with the top priority allows for one decision to be made over the other Better to make a decision on a relevant goal that you want to achieve now versus one that wont be achieved for 20+ years? Third step – for each financial goal - get a list of possible options and relevant factors together I like lists – but they help me in making large decisions – In most cases – you will have more than one possibility – but there are almost endless possibilities at the same time Need to start to narrow

Welcome to Finance and Fury. Quick announcement – only episode this week – have my FASEA exam coming up so need to spend spare time studying for that – back to normal next week – sorry for any delays getting back to any of you In this episode – I walk to talk about different forms of capital – What is the first thing that you think of when you hear capital – outside of finance, might be capital letters or a capital city – but capital as an economic definition - consists of assets that can enhance one's power to perform economically useful work – and this can range from many different forms beyond the financial Going off of pure financial topic today – I find these topics incredibly interesting – Came across this concept of additional forms of capitals that builds upon Bill Mollison's original conception - Bill was an Australian researcher, author, scientist, teacher and biologist – passed away a few years ago but his works were massive in developing and promoting the theory and practice of permaculture – which I have been studying for the past few months Permacultureis a set of design principles centred on whole systems – mainly focusing on simulating the patterns and resilient features observed in natural ecosystems - It uses these principles in a growing number of fields from regenerative agriculture, rewilding, and community resilience in Permaculture – there are many valuable assets to an ecosystem which categorized non-monetary forms of wealth by their potential – interesting on a conceptual level - but not easily applied to the real world as value and capital are fairly engrained into society to mean monetary wealth However – brings up a number of points on what isnon-monetary capital Example – might be a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument – or might be the knowledge to combing the two and know how to shoot the completed material Capital is anything that is useful that can be brought to society that is of some worth – doesn't necessarily need to be have a monetised value Concept of give someone a fish, they are fed for a day – or you could sell someone fish or be the purchaser of the fish – go to Coles and buy 1kg of Barramundi for $32 - But granted for the resources around them - tech someone to fish – they are fed for a lifetime – but the need forms of capital to achieve this – the capital in the form of tools, capital in form of knowledge By viewing the financial system through the lens of all forms of capital - there can be unique forms of currencies - Financial, material, living, social, intellectual and experiential Financial Capital - This is the one that we are all familiar with – one that I talk about most on this podcast – It is a core component of the modern financial system – so hard not to – it is the means by which pretty much all exchange goods and services occurs within society – If you need to buy anything – you use money as a medium of exchange to do so – the more money that you have at your disposal the more you can purchase When the world is viewed solely in financial capital terms – you have the pure materialistic – but it ignores all other forms of capital Not saying that it isn't important – but if you could purely have money and nothing else – doesn't put you in a well rounded position – so what other forms of capital are there Material Capital - Beyond money, it is easy for us to conceptualize physical goods and objects that we own as being their own sort of capital When this is brought up – most people will think of materialistic concepts – like cars, possessions, etc. But the real concept of this goes far beyond – it can be extended to the raw materials extracted from the Earth and are developed into more complex forms such as houses, cars, consumer goods, etc. In a society where financial capital falls through – material capital becomes one of the more important factors – for instance bater economies – the stories of trading a wheelbarrow for bread in hyper inflated Germany In parts of the world right now – those that have fallen due to centralise power of governments with price controls – like Venezuela - have black markets of material capital for food and other resources Living (Natural) Capital - This form of capital is closely related to material capital - but involves both the living organisms upon which we depend and necessities of life which sustain us For example – things like plants, animals (foods), water – this form of capital comes back the abundance or quality of these resources that you have Here – Land, water and power is the best example – do you have the ability to produce something that can be traded for financial capital Are these things being provided by yourself or something else – where you exchange financial capital in return Also goes into food produce – especially land and water in combination – if you produce some of your own food or resources – can reduce the financial capital you need Social

Welcome to Finance and Fury, the Furious Friday edition. Last week we went through the Fed Theory and disconnect theories. Today I want to look at an overlapping theory to this on what is happening in society as well. I just finished an interesting book called the fourth turning and I wanted to share some insights into this. So much of what is happening in the world is built around politics – politics and the economy – but it is nothing new - the economy is us and our interactions with one another in commerce – and is a complex system – but at the moment there is a lot of conflict – and the tendency to try and control a complex system Politics – whilst most people vote – especially in Australia where it is compulsory – we have little to no say in the policies being implemented – But even less so when it comes to Central banks and the monetary system – none of us get a say in how Monetary policy is conducted – get some say as far as voting for people who promise some fiscal policy – but when they are in anything goes However – the entire central banking community is a controlled financial system by bureaucrats who are unelected and unaccountable – when they make poor decisions – no consequences I would say that they have more power over our daily lives than politicians – they aim to control and direct individuals' consumption and production behaviours – all done normally from meeting 11 times a year When you stop to think about it – this system doesn't seem that natural – unlike a cycle of growing old Are things unravelling or just unfolding on a normal cycle? And how do central banks and Governments fit in? Brings in the concept of the Fourth turning – by authors Strauss and Howe - Similar to K Wave theory – there are Cycles – and turnings within a cycle - each turning as lasting about 20–22 years – and four turnings make up a full cycle of about 80 to 90 years – essentially the average life expectancy Generational change drives the cycle of turnings and determines its periodicity – or the tendency for patterns to recur at intervals – so every 20 or so years you have one turning – like the four seasons – then like a year – you have a full cycles – but in this case every 80-90 years As each generation ages into the next life phase and with it comes a new social role that they fill – Go from children, to young adults, to mature adults, to retirees – within the economy and society each will likely serve different functions – even in planning that I do for clients – see different stages of life and individuals have different goals – buying first home to retiring and drawing upon accumulated assets With this - society's mood and behaviour fundamentally changes – which gives rise to a new turning and inevitably – a new cycle In this book – they point out that there has been symbiotic relationship between historical events and generational personas - Historical events shape generations in childhood or young adulthood - then, as parents and leaders in midlife and old age - these generations in turn affect history Different generations have different lives – have different lessons from different environments - But these differences follow patterns – different generations followed by other kinds of generations Each of which is Shaped by location and their time and place in history and what is happening around them – implies a pattern through history – Does play out in different forms in each turning – as the time and place in history has always looked different – the 30s looked different today from population size, technology and economic factors - but they have similar patterns – as these patterns date back to the 1500s – which looked vastly different to the 1900s where electricity – probably a bigger technology shift compared to the internet occurred – but the relative changes of the ups and downs within society and the economy – i.e. each turning follow similar patterns – then there tend to be regime changes for dominance – rise and collapse periods moving in 80-year cycles Each generational Mood is important – at one extreme is the Awakening and at the other is the Crisis The Awakening – this is compared to summer and Crisis compared to winter The other two turnings in between are transitional seasons – where you have the High and the Unravelling High is similar to spring and the unravelling is similar to autumn In this book they went through 26 theorized turnings over 7 cycles - from the year 1435 through today To go into further detail on each of these – High - the First Turning - occurs right after a Crisis During this period - Society is confident about where it wants to go – there is high confidence in the future and most people are on the same page – in the book - the most recent First Turning was the post–World War II around 1946 and ending around the early 1960's -in the US coincided with the assassination of John F. Kennedy Awakening - Second Turning - era when institutions are attacked in the name of pe

Welcome to Finance and Fury, the Say What Wednesday edition. This week the question comes from Justin. "Hi Louis - I have been listening to your podcast for the last few months. I love all your work. I was just listening to Mondays episode of your review of the budget. And I had a question for you that maybe you could use on the podcast. The question is about the governments Future Fund and whether they could access this is a potential option as like a bail out for the current economic problems we are facing and into the future. Seeing as some of the fund is for medical research they now need it seems. For emergency help with fire, floods and a health pandemic. Also considering in the whole fund there is $212 billion in the fund. I would love to hear your thoughts on this." That's from Justin – Brings up some great points – why wouldn't the Government use the Future Fund to help boost the economy – one major reason for this – which we will run through today – Look at the future fund, what it is made up of, and what the true intention is - What is the future fund – The Future Fund – called Australia's Sovereign Wealth Fund - is an independently managed sovereign wealth fund established in 2006 The statement is that it is to strengthen the Australian Government's long-term financial position – this is what they say anyway – but will come back to this later – The board of the Future Fund also manages another five public asset funds, giving it responsibility for investing A$205 billion on behalf of the Australian Government As at 31 December 2019 – The Future Fund component was valued at A$163 billion – a large chunk of the $290bn added to the budget could have been funded by this Purpose – The legislation establishing the Future Fund describes its main object as being 'to strengthen the Commonwealth's long-term financial position' This is why I don't like politician or legislative speak – most people would think that this statement means to help Australia – it is the Australian Sovereign Wealth Fund after all – but the commonwealth is not you or me – it is the Government – and those officials within it as we will see shortly - While legislation permits withdrawals from the fund from 1 July 2020, the government indicated in 2017 it intends to allow the fund to continue to accumulate until at least 2026/27 before making withdrawals. The Investment Mandate for the Future Fund is to target a benchmark return of at least the Consumer Price Index + 4 to 5 per cent per annum over the long term, while taking an acceptable but not excessive level of risk History – In 2004 – it was announced at the time by Treasurer, Peter Costello It is an Interesting concept – Governments invest funds - economists questioned whether the government could save money this way and likened it to saving one's own IOUs. The Future Fund Act 2006(Cth) received Royal Assent on 23 March 2006 – received original capital A$18 billion, derived from government surpluses as well as income from the sale of a third of Telstra in its ongoing privatisation, was deposited into the fund. 2007, the government transferred the Commonwealth's remaining 17% stake in Telstra, valued at A$8.9 billion, into the Fund. These contributions and transfers increased the Fund to over A$50 billion by the end of the 2006-2007 financial year. 2007 - it was revealed that the Chicago-based Northern Trust Corporation had won the tender process to manage the Fund. Rick Waddell, President and Chief Operating Officer of Northern Trust, indicated that Australian companies did not have the expertise to manage the Future Fund Northern Trust stood to collect A$30 million in annual fees – but more now - Controversy arose when it was realised that the Fund will be managed by a foreign bank with no base in Australia. How is the money managed – Investment decisions - The Board of Guardians is responsible for deciding how to invest the assets of each fund, in line with the legislation and the investment mandates and independently of the Australian Government. The Board of Guardians receives recommendations and advice from the management team and reviews, approves and oversees the investment strategy. There are a range of factors that contribute to our investment strategies, including the investment mandates, the purpose of the funds and the level of risk - "Our investment approach is based on one investment team working together for the benefit of the portfolio as a whole. We call this our 'one team, one portfolio' strategy." Have the normal players involved in managing the money – lots on the list – State Street, Macquarie, BlockRock, etc. Asset allocation – So you have the Future Fund and then 5 other funds underneath this Originally it was just the future fund – but 5 additional funds now are managed by the board of the future fund – history: 2008 – it was announced that three new "Nation-Building Funds" would be created - also to be managed by the Future Fund Board. These included a $

Welcome to Finance and Fury. This episode – want to continue looking at theory versus reality – Focus on the theory of Value versus Growth investing in an inflationary world – and which one does better Looked at if inflation will return – but if it does - maybe Value shares start to outperform growth shares again Inflation is a major focus in the current economic world – especially since the 90s – Everyone pays attention to it - Investors, businesses and especially Central banks - continuously monitor and worry about the level of inflation Some just have to worry about it – whilst one tries to control it through interest rate policy Inflation—the rise in the price of goods and services—reduces the purchasing power each unit of currency can buy. Rising inflation has an insidious effect: input prices are higher, consumers can purchase fewer goods, revenues, and profits decline, and the economy slows for a time until a measure of economic equilibrium is reached This occurs when there is inflation without the economy booming Don't like to generalize about inflation's impact on equities and markets - different groups of stocks seem to perform differently But Historically – some studies on data have shown in general - Value stocks perform better in high inflation periods and growth stocks perform better during low inflation – but these timeframes were over a decade period However - When inflation is on the upswing, income-oriented or high-dividend-paying stock prices generally decline – which seems counter intuitive – as these types of companies are a core component of value investing portfolios Overall – shares – both growth and value types do seem to be more volatile during highly inflationary periods. Investing for me is a long-term strategy – have to try and look at long term You have to be thinking into possibilities for the future – have to potentially plan for higher inflation at some point but there are likely some areas of the market that would benefit more from an inflationary spike than others. In a low rate, low inflation world, growth stocks tend to perform better while value stocks tend to do better when inflation is higher – what has been seen over the past decade or more now However – what does the theory say The general theory goes along the lines of the following - The same thing is true of promised future growth in revenue or profits for growth stocks. Value stocks likely already have cash flows now that will likely decrease into the future. Thus, higher interest rates should hurt value stocks less than growth stocks since the higher hurdle rate makes future growth not worth as much. This theory is thinking about growth stocks like they are a bond but based around the assumption that the reason inflation is such a big risk for bondholders is because the purchasing power of your fixed rate income payments is eroded over time by inflation. However – I think that there is a different explanation to this – interest rates and debt financing costs More so that the bond is worth less in real terms when it matures than the ongoing income – If there is inflation then the company should be able to sell its good at a greater rate – Original theory - The original Fama-French paper covered a period of very high inflation, the years 1963-1990, and consequently showed a robust value effect Fama and French were professors at the University of Chicago Booth School of Business – lots of works Towards the start of the 90s, interest rates and inflation commenced a long and powerful decline - continues to this day—just the sort of environment expected to favour growth stocks Back with the gold standard and there is zero inflation - growth and value stocks have equal returns Looking at the data – have a measurement of High Minus Low (HML) is a value premium - value stocks over growth stocks From back in the 30s – I/O - -2% and -4.5% 40s: 5% and 10%, 50s and 60s: 2% and 4% 70s – 7% and 10%, 80s: 5% and 6%, 90s and 2000 – 2.5% and 4-6%, 2010s – 2% and -4% Mapping this out - the slope of HmL on inflation is 1.1, so each one percent of inflation adds about one percent of HmL. Thus, if inflation stays at 2% to 3%, we can expect an HmL [value premium] of similar size. And not coincidentally, the HmL for the full 74 years from July 1926 to June 2000 was 3.36%, while inflation was 3.12% But the most recent decades have been mixed – since the 90s – with inflation same rate as the 50s and 60s – underperformed by 10% - Looking at how this works - the data that the HmL uses is dependent on the absolute level of inflation – not its rate of change in an efficient market – should a high (or low) rate of inflation produce high (or low) HmL? Based around the theory – it can be assumed that a static high or low inflation rate would be discounted into prices Going back to the theory – at the heart of the value premium – if markets were efficient and always followed theory - any premium can only be compensation for some sort of risk Bu

Welcome to Finance and Fury, the Furious Friday edition. Today – want to look at market theory versus reality – because a lot of market theory doesn't hold up – so are the markets truly changing? Is this just a short term divergence prior to markets going back to match traditional investment theory? Or are markets transitioning to an entirely new systemic paradigm – If so - Metrics of the past will not be able to predict how markets behave according to expectations In this episode – have a look at some theories of market changing – later in probably another episode - want to focus on something else I haven't covered – Want to look at an alternative view – such as looking at social dynamics shifting in society – Summary Strauss–Howe generational theory – similar to the K Wave theory – but apply this to markets next episode To start – let's look at Theories versus reality – essentially, what should happen versus what is happening Most existing theories of economics and the financial system cannot match successfully with current conditions – Technically – in the short term they haven't be able to for a while – but over the long term they could at least have some validity to them Buying companies undervalued and holding them long term – Value investing used to do well – was the bedrock of a lot of investment strategies – however now it has been significantly underperforming The strategy of following metrics and long-term data on corporate earnings, Treasury yields versus dividend yield strongly suggest a fundamental break with the past is in progress Current theories – on PE, things like CAPM – don't hold up – "Fundamentalist Theory" – based around that the action in the Financial System's and markets is reflected by something fundamental That "something" is defined by an economic performance or metrics e. there is low interest rate – there should be higher inflation and be seeing real GDP growth and lowering employment corporate profits are low and P/E ratios are high – so the markets shouldn't be charging ahead The market should be lower based around fundamentals – but they aren't – so what are some theories on why this is If markets are changing - past economic and financial system models, analytical tools and metrics will have to be entirely reconsidered and reconstructed That is the issue with a lot of the theory – for instance what I learn at Uni – gets adopted decades after the real-world changes occur How theories based on evidence work – need to have the evidence there to have it be applicable to a scenario – so theories are lagging – which can be an issue Following most economic or finance theory from today was based around fundamentals in the 80s or before – Over the past few months – all of the market and economic events associated with the COVID-19 analysts have struggled to match the action in the Economy with that of the Financial System Existing disparities have been amplified through maldistribution in the financial system - dramatically exacerbated the financial indices but at the same time – increased disparities in the population around the world Those invested have high net wealth while those that weren't haven't seen this rise In no quarter is there found any real explanation for the utter failure of all existent theories to anticipate or explain our current experience. I'll admit that I am annoyed by this – what should be happening in markets isn't – makes it hard to predict anything – especially when market performance is being buoyed by Central banks as the last line of resort – creates an insider's club As the general public – we are the last to know and insiders in the market have already had a chance to react – Look at the group of 30, or the club of Rome – where key central banking figures sit at the same table as the heads of the largest investment banks in the world as well as politicians They have private meetings – would have to be naive to believe that something every now and then doesn't get mentioned as to what policy will be taken Its not like there people are friends beforehand – they are selected for these groups based around what they bring to the table At the moment – there seems like there is a Secular or Systemic Shift occurring – and if so - this creates a situation where prior investment theory can become obsolete – as the inputs that drive markets change – still based around supply and demand – but the factors that affect both change - implications would be so far-reaching and so all-encompassing for the share market But this isn't the first time this has occurred – theories do change rather often due to the inputs to the financial system altering that it is probably similar to the shift occasioned by the Age of Enlightenment, the Scientific Revolution, the American Revolution and (later) the Industrial Revolution – markets were different – inputs were different – things evolve – cover more on this next FF ep Interesting thing at the moment - irrespective of viewpoi

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question is from Scott: "Hi Louis, I am currently in my 30s and have recently bought my first home. I would like to get your view if I should take advantage of low interest rates and start to put additional funds into my mortgage or if I should be thinking long term and investing instead. My mortgage is around $580,000 and I would like try to get this paid off as soon as possible but at the same time, know that investing could put me in a better position. Would love to get your thoughts on this." Great question - Invest or pay off debts – This episode is general in nature - This isn't personal advice – look at the pros and cons of paying off debt versus investing – look at the opportunity cost of each situation What is the right thing to do? Depends on your goals and financial position – one strategy isn't right for everyone Someone in their 20s – may be better to invest – have long timeframe for funds to grow - Someone in their 50s – may be better to pay debt First step is to look at your overall levels of debt – Not talking investment debt here – but bad debts – the non-deductible debt – costs cashflow and has a negative compounding return from the interest Also depends on how much debt you have and your LVR – if you have no savings – better to save a little before investing Example – if you have bought your PPR for $600k – but have $550k of mortgage on this – might be worthwhile to focus on debt repayment for a little while – Put yourself back into an 80% LVR – protect from the bank coming for your house if values went through a massive decline Also – have the potential to refinance for a better rate – sometimes banks can give you a worse rate if you are seen as too much risk Say you are on a decent interest rate and have an LVR of below 80% - what is best to do Concept of hurdle rate – this changes over time – based around interest rate movements versus long term return potentials Question - What is the minimum benchmark for opportunity costs? You want your money to work for you – so need to price it into the equation – Little point saving at the moment beyond having enough in emergency funds So what is your opportunity cost for your money? Say it is 5% p.a. – then mortgage repayment at the moment is below this level Interest costs versus return potentials Interest costs are to your income only – Debt levels don't grow Investment returns also change – have an income level but also growth – Have to take into account the potential for inflation – Inflation is your friend if you have debt Inflation is not your friend if you have cash savings or an investment Both situations eats away the real returns Current situation – Low interest rates, low inflation, uncertainty in the markets – But any strategy is long term – but has to adjust over time – The long term outcomes focus here – given in your 30s – long term game – mortgage has a 30 year timeframe Looking at the options - Investing – two options here - Personal or super through salary sacrifice Personal investing – would need to select funds that can be invested on a monthly basis Or alternatively – save up lump sums against your mortgage in an offset account and then invest once you reach a level Salary Sacrifice – put funds into super pre-tax – would gross up the level overall - depends on your own personal income Or if you are in a low income bracket – or a partner or spouse is – below the $38k p.a. level – can place in funds to super as a non-concessional - $1k gets the $500 bonus But super would only be an option if you are either getting closer to retirement or don't mind going without the funds until preservation age – so would by 20+ years Extra Mortgage repayments – Offset accounts versus paying down the mortgage Lets say that you have an interest rate of 3.5% p.a. on the $580,000 – total repayments of $2,608 p.m. Interest costs of repayments would be $1,692 p.m. – total interest cost of $356,600 over 30 years Examples – Say you have spare cashflow of $2k p.m. = $24k p.a. Mortgage repayment – put $2k p.m. onto the loan – reduce your mortgage down to about 13.5 years from 30 year period - you would save $212,805 in interest Investing in a fund – gets 8% p.a. on average – put in $2k p.m. – same time period of 13.5 years (162 months) Total investment value is $584,112 - however similar to the mortgage you have contributed funds – Contributed funds is $324,000 - The growth in assets is $260,112 So the difference – interest saved versus the growth of the investments Interest of $212,805 versus growth of $260,112 = $47,307 in additional value But what happens after this? 14 years' time – you have a mortgage paid off – or around $400,000 left on the mortgage if you keep making the minimum repayments Now you have another choice – keep investing or make additional debt repayments Say from the 14 year mark – if you have your mortgage paid off – you can put $4,608 into an investment now

Welcome to Finance and Fury Budget came out last week – this episode – go through the fiscal overview and the policy measures in it Fiscal overview – provided updates on the government budget position and economic updates Government – added $289 billion in fiscal spending and balance sheet measures - equivalent to around 14.6 per cent of 2019‑20 GDP At the same time - estimated large declines in taxation receipts has seen a major deterioration in the budget position, with estimated deficits of $85.8 billion in 2019‑20 and $184.5 billion in 2020‑21 – so the annual position is a loss Gross debt was $684.3 billion (34.4 per cent of GDP) at 30 June 2020 and is expected to be $851.9 billion (45.0 per cent of GDP) at 30 June 2021. Net debt is expected to be $488.2 billion (24.6 per cent of GDP) at 30 June 2020 and increase to $677.1 billion (35.7 per cent of GDP) at 30 June 2021 – gross going up by 24% and net debt going up by 39% Real GDP is forecast to have experienced its sharpest fall on record in the June quarter - expected to pick up in the September quarter and beyond, with the easing of restrictions in most parts of the country. Real GDP is forecast to fall by 0.25% in 2019‑20 and by 2.5% in 2020-21. In calendar-year terms, real GDP is forecast to fall by 3.75% in 2020, before increasing by 2½ per cent in 2021. The economy is forecast to recover faster than in past recessions due to the unwinding of restrictions, but it will be a long road back. The unemployment rate will remain elevated for some time. The economic and fiscal outlook remains highly uncertain. The Government will provide forecasts and projections over the forward estimates period and medium term in the 2020‑21 Budget, to be delivered on 6 October 2020. Table 1.2: Major economic parameters(a) Outcome Forecasts 2018‑19 2019‑20 2020‑21 Real GDP 2.0 ‑ 1/4 ‑2 1/2 Employment(b) 2.5 ‑4.4 1 Unemployment rate(b) 5.2 7.0 8 3/4 Consumer price index 1.6 ‑ 1/4 1 1/4 Wage price index 2.3 1 3/4 1 1/4 Nominal GDP 5.3 2 ‑4 3/4 Key policy measures – This is a delayed budget – not like a normal budget - A lot of it is specific to Covid – like health and stimulus to sectors of the economy Health – major focus - committed $9.4 billion for the health response - large‑scale purchases of Personal Protective Equipment (PPE), boosting Australia's testing capacity and ensuring access to essential health services through expanded telehealth. also investing in finding a vaccine and treatments for COVID‑19, as well as better preparing for future pandemics. The Government has boosted Australia's testing capacity to meet the challenge of the COVID‑19 pandemic, including by establishing dedicated Medicare‑funded pathology tests and dedicated respiratory clinics, with coverage of 97 per cent of the population. The Government is also providing $3.7 billion to build our hospital system capacity Government has enabled whole‑of‑population Medicare subsidised telehealth for medical, nursing and mental health services The Government is working with Community Pharmacy and the medicines supply chain to ensure ongoing access to essential medicines to ensure that Australians in home isolation can continue to access the medicines they rely on In addition to the National Partnership Agreement on COVID‑19, the Government is investing $131.4 billion in Commonwealth funding for Australia's public hospitals, an increase of 30 per cent over the previous five years, through the 2020‑25 National Health Reform Agreement. Reopening recovery JobKeeper payments – the payments to businesses significantly impacted by government restrictions to cover the costs of their employees' wages over 960,000 organisations and over 3.5 million individuals covered - at 16 July, payments have totalled $30.6 billion over the six JobKeeper Payment fortnights to 21 June the Government announced the JobKeeper Payment will be extended to 28 March 2021 - Payment targeted to those businesses that continue to be most significantly affected by the economic downturn level of the JobKeeper Payment will be tapered in the December 2020 and March 2021 quarters to enable businesses to transition towards their long‑term recovery A two‑tiered payment will also be introduced from 28 September - better match the Payment with the incomes of employees before the onset of COVID‑19 It is estimated that the total cost of the JobKeeper Payment will now be $85.7 billion over 2019‑20 and 2020‑21 The review also found that the JobKeeper Payment has a number of features that may create some disincentives — for example, dampening incentives for some employees to work and for some businesses to consider their long‑term viability. While these are unlikely to be significant in the short term, the review considered that they are likely to become more pronounced the longer the program runs. Support for individuals and households – income support payments - $16.8 billion over five years from 2019‑20 Coronavirus Supplement is $550 per fortnight fr

Welcome to Finance and Fury, the Furious Friday edition. Episode today about a trend over the past decade and moving forward – is water the new petroleum? A few episodes ago – went through what is more valuable – a TV or water – depends on your perception and what is in demand versus supply – but if you think about it – what is the most valuable thing to us as humans – I would argue - Air – Water – food – our survival is predicated on these three things – rule of 3 here – 3 minutes, 3 days and 3 weeks – but due to supply – they are seen as having low values – if viewed in monetary terms – we don't even really think about it most of the time – why would we? Air is in abundant supply – water seems to be everywhere – turn on a tap – even food – especially fast food – if you can call it food is very cheap – this is not so much a concern for most people in western nations Hard to monetize air – food has already been monetized – but what about water? It has – but is seen as a public good – quite low cost - A trend has been occurring in the water sector which is accelerating worldwide- appearance of the new "water barons" – the investment of the Wall Street banks and multibillionaires - buying up water all over the world at unprecedented pace since the late 2000s. Banks such as Goldman Sachs, JP Morgan Chase, Citigroup, UBS, Deutsche Bank, Credit Suisse, Macquarie Bank, Barclays Bank, the Blackstone Group, Allianz, and HSBC Bank – plus many others are consolidating their control over water Goldman Sachs: Water Is Still the Next Petroleum Back in 2008 - Goldman Sachs called water "the petroleum for the next century" during its annual "Top Five Risks" conference – was reported that those investors who know how to play the infrastructure boom will reap huge rewards – said a calamitous water shortage could be a more serious threat to humanity in the 21st century than food and energy shortages Goldman Sachs has convened numerous conferences on future public issues - have published lengthy analyses on most commodities - water and other critical sectors like food and energy Goldman Sachs is positioning itself as a massive player in the water business – buying up water utilities, water engineering companies, and water resources worldwide - Since 2006 - Goldman Sachs has become one of the largest infrastructure investment fund managers and has amassed $10s of billion capital for infrastructure, including water. JPMorgan Chase – aims to Build Infrastructure War Chests to Buy Water, Utilities, and Public Infrastructure Worldwide JPMorgan Chase is one of the biggest banks in the world - has aggressively pursued water and infrastructure worldwide – sees this as a global phenomenon and is planning to cash in on water and infrastructure JPMorgan's own analysts estimate that the emerging markets' infrastructure is approximately U.S.$21.7 trillion over the next decade In a JP Morgan equity research document, it states clearly that "Wall Street appears well aware of the investment opportunities in water supply infrastructure, wastewater treatment, and demand management technologies." Citigroup: The Water Market Will Soon Eclipse Oil, Agriculture, and Precious Metals UBS: Water Scarcity Is the Defining Crisis of the 21st Century UBS is Europe's largest bank by assets – back in 2006 - UBS Investment Research had a 40-page research report titled "Q-Series: Water - Water scarcity: The defining crisis of the 21st century?" – looking at the future of water assets and how to cash in on this Credit Suisse: Water Is the "Paramount Megatrend of Our Time" 2008 - Credit Suisse published a report - urged investors that "One way to take advantage of this trend is to invest in companies geared to water generation, preservation, infrastructure treatment and desalination. Water is likely to become a scarce resource." recognizes a water-supply crisis might cause "severe societal risk" in the next 10 years and that two-thirds of the world's population are likely to live under water-stressed conditions – was already happening in South Africa - Allianz Group – has a very interesting take – that Water Is Under-priced and Undervalued They have a has the philosophy that water is under-priced – most of these banks have a Water Fund – Allianz is no different – the co-manager of the fund in Frankfurt - "A key issue of water is that the true value of water is not recognized. …Water tends to be undervalued around the world." Allianz sees two key investment drivers in water: (1) upgrading the aging infrastructure in the developed world; and (2) new urbanization and industrialization in developing countries such as China and India Between Goldman Sachs, Morgan Stanley, Credit Suisse, and the Carlyle Group – estimated to have amassed $250 - $350 billion allocation to water infrastructure projects globally These investment banks have been preparing and waiting for a moment for years – the rise of water prices - starting to privatize water, municipal services, and

Welcome to Finance and Fury, the Say What Wednesday edition. This week the question comes from Mina. "I would love to get your view on Structured products like the ones being offered by sequoia. Is the risk worth the return?" Great question – thanks Mina - this episode is not investment advice – general nature - Structured products – A structured product – can also be referred to as a market-linked investment – they are a pre-packaged structured finance investment strategy based on an underlying asset This can be built around a range of assets – from a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies – complex structure They are an investment product that is put together by a financial institution - usually by a bank or investment firm – pre-packaged exposure to one or more underlying assets typically contain an embedded over-the-counter derivative contract, such as an option or swap, and they are often blended with a bank deposit or government bond to provide capital guarantees Structured products are a fixed-term investment that typically lasts between 3 and 10 years – most of sequoias are 3 years With these investments - as the value of the basket of assets rises over the 3–10 year period - the probability of the target return rate being met once the investment reaches full maturity increases Massive range of different types of structured products – as they are designed to provide investors with a range of different pay-offs – Like most structured products – like managed funds - the payoffs depend on the performance of the underlying asset But have additional elements – some structured products aim to provide investors with capital protection - others seek to generate enhanced levels of income or growth through leveraged exposure to the underlying assets that make up the product – so the risks can be very small – or large depending on the type Two major categories of structured products - Structured deposits and structured investments Structured Deposits – can be thought of as a mixture of a savings account and an investment With these – the invested funds are protected and even if the value of the underlying stock market index falls - considered a lower-medium risk Structured Investments – more of a capital-at-risk accounts – but aim to provide a higher return than a Structured Deposit With this type of structured product there is the risk of losing money if the underlying assets fails to perform A few types of structured products include: Capital-guaranteed structured investments – blend a bank deposit with an option or a leveraged investment in the underlying asset ratio between the deposit and the risky asset may either be fixed or flexible - at maturity investors either receive their capital back or their capital plus a return depending on the performance of the underlying asset As with any derivative transaction, investors need to ensure that they fully understand all the costs and risks as well as how the returns are to be calculated. Are they a good investment option? They are complex investments – so you need to fully understand what you are getting yourself into Structured Products were subject to mis-selling scandals due to the sellers not fully understanding the product- one case with Lloyds Bank where it was claimed to have mislead their consumers with an impression of a highly likely return through Structured Products However - there is a chance you may not make any return at all What are the benefits - Structured Products can be good if you don't want to risk all of your capital – Due to the structure – you can get ones that have the majority of your money set aside for protection Structured Products can offer a medium risk method of investing Major risk is that you lose on this investment if the counterparty or deposit taker becomes solvent. This is only if you invested in a Structured Deposit as Structured Investments are not protected in the same way Returns - Issuers normally pay returns on structured products once it reaches maturity – but can pay coupons (income) along the way Can be called a payoff - or returns – but the performance outcomes are contingent For example - if the underlying assets return "x," then the structured product pays out "y." Creates a situation where a structured products performance is closely related to traditional models of options pricing- known as being in the money or out of the money - although they may also contain other derivative categories such as swaps, forwards, and futures, as well as embedded features that include leveraged upside participation or downside buffers Looking at an example -Consider that CBA issues structured products in the form of a capital notes—each with a notional face value of $1,000 – structured product is actually a package that consists of two components: A zero-coupon bond and a call option on an underlying equity investments – like CBA shares or ETF that mimics th

Welcome to Finance and Fury. A lot of people may be feeling regret right now - regret for not holding technology shares like Afterpay – it is up around 850% from the low in March Was not buying tech shares a bad decision? And is there potential from here? Look at this in this episode – Most people want to make the correct decision for investments – hard to know what is the correct decision - When looking at some sectors of the share markets - technology stocks in particular – might be having some regret for not investing But looking at these companies – the price may indicate that these are great companies Is it sensible or a bad idea to buy a company with a negative earning per share? Or a massive PE? There are plenty of shares in this basket - Afterpay – APT on a PE of minus 450x this year – technically doesn't have a PE – but looking at the losses per share of $0.15 to $0.20 – looking at future projected earnings – in 2 years company would have a PE of 230x Xero - XRO on a PE of more than 1,000 times - 180x on 2022 forecasts Wisetech Global - WTC on 110x PE - and 50x on 2022 earnings forecasts NextDC - NXT on minus 305x PE and 231x 2022 forecasts – has a debt to equity of 100% List goes on – rate to find a company with a PE less than 70x in the tech basket In the US – The FAANG - Facebook (FB), Amazon (AMZN) 142PE, Apple (AAPL), Netflix (NFLX); and Google (GOOG) - stocks plus Microsoft account for 27% of the S&P 500 but only 8% of the revenue. The equity market in the US is valued at 152.2% of GDP - a record. Returns over the past 5 years – on the S&P500 – 78% of the gains have come from tech, telecommunication or e-commerce – around 50% comes from tech alone Also have other companies – like Tesla Tesla is up +330% since March 18th, and over +760% since June 2019 – remember back then it was troubled by bankruptcy concerns Since March, Tesla has added just over 8 Ford Motor Companies, 27 Renaults, or more than the entire market cap of Toyota ($176bn USD) Tesla is over 3 times the size of the "S&P 500 Automobiles and Parts" sector,even though it's not a member or in the S&P 500 (it would be the 15th largest) Tesla's market cap ($287bn) has grown to over a third of the combined market cap of the US, EU and Japanese auto indices. Where does Tesla rank compared to other auto companies – VW, Toyota, Daimler – top 3 – top two around 10.5m cars each year – TLS made 380k cars a year Tesla is at $280bn market cap – Tesla EPS -$0.81 = PE of negative 1,852 Toyota – has a EPS of $16.40 – PE of only around 7.5 times Tesla's overall share of the global autos market has grown from 0.1% in 2017 to an expected 0.8% in 2020 – which is impressive - but remains minuscule - VW is at 14% - has a market cap of $82bn USD and pe of under 7 What is going on? It has become fairly obvious – it has little to do with fundamentals - PE, the future projected earnings or intrinsic value Most of the price growth has been about not missing out on getting into the big winners and household names – i.e. making easy gains Comes back to extraordinary volatility and getting into the massive momentum – the rebound in the markers that has been behind the opportunity to buy these growth companies in a world where rates are near zero logic suggests the equity market should be down the drain right now due to a global economic downturn Growth versus value shares – Since the market downturn – value shares have started to underperform March 2019 – Jan 20 – was about even – sitting at 100 of neither growth or value outperforming the other – since then growth has started to outperform – gone up from 100 to 145 – meaning that there is an out performance of 45% on growth shares compared to value This isn't just coming from individuals getting in on household names Professional managers – The monthly Fund Manager Survey from Bank of America is best known for the monthly chart showing what everyone on Wall Street thinks is the most crowded trade Crowded is what is thought to be the top trade – or largest holding positions What was it this month - not only did it confirm that the one trade - is the most popular sector on Wall Street – but also – that it is also the fact that this trade has been made with the biggest margin on record – i.e. the largest amount No surprise that this trade is Long US tech stockswhich is what 74% of BofA survey respondents said they thought was the most crowded trade on Wall Street The sentiment on Wall Street at the moment – is that they are convinced that others like them who are finance professionals are all in on tech – backed up by the percentage of agreement behind tech being the most crowded trade is the highest of any monthly response in polling history Outside of shares – looking at the bond market – which is three times the size of the equity market – painting a different story US bond yields are at record lows and discounting negative rates from mid-2021 to 2023 despite the Fed saying they will resist that. The equity m

Welcome to Finance and Fury, the Furious Friday edition. In the last two Furious Friday episodes, I've talked about the regulation and de-regulations on the monetary and fiscal sides. Covered the Banking Act of 1933 and the Glass-Stegall section of this – then the financial de-regulations that occurred in 1986 and 1999 – some interesting events have played out since then What I didn't cover is that there was a step taken back after GFC – to help undo some of the de-regulation a rule in the US that was designed to prevent banks that receive federal and taxpayer backing in the form of deposit insurance and other support from engaging in risky trading activities – called the Volcker rule but recently got watered down 3 weeks ago – might have something to do with loan products that banks are now offering due to business shut downs – interesting timing and connections which we will run through today The Volcker Rule is a federal regulation that aimed to prohibit banks from conducting certain investment activities with their own accounts – also aimed to limit their involvement with hedge funds and private equity funds - called covered funds The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis Named after former Fed Chairman Paul Volcker, the Volcker Rule is a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act The Volcker Rule prohibits banks from using their own accounts for short-term proprietary trading – Proprietary trading occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money, aka the nostro account, contrary to depositors' money, in order to make a profit for itself – so using the banks own assets to trade was barred also bars banks, or insured depository institutions, from acquiring or retaining ownership interests in hedge funds or private equity funds beyond a cap of 3% the rule aims to discourage banks from taking too much risk by barring them from using their own funds to make these types of investments to increase profits The Volcker Rule relies on the premise that these speculative trading activities do not benefit banks' customers Still allows banks to continue normal activities - market-making, underwriting, hedging, trading government securities, engaging in insurance company activities, offering hedge funds and private equity funds, and acting as agents, brokers or custodians – all of this is allowed to generate profits But banks aren't meant to engage in these activities if doing so would create a material conflict of interest, expose the institution to high-risk assets or trading strategies, or generate instability within the bank or within the overall U.S. financial system For instance = securitising their own lending and betting on this – or using their own funds to take too much risk on – as the banks own funds are meant to be protected with the TBTF legislation – take all the risk but bear none of the responsibility if it goes wrong Depending on their size, banks must meet varying levels of reporting requirements to disclose details of their covered trading activities to the government. Larger institutions must implement a program to ensure compliance with the new rules, and their programs are subject to independent testing and analysis. Smaller institutions are subject to lesser compliance and reporting requirements. Think of it as a Glass-Stegall lite version – limits some activity but not all – there are always loopholes – Doesn't say anything about using depositors' funds – which are on 'loan' to the banks – so technically not their own money which wouldn't be considered proprietary trading Also - where those who were proprietary traders or derivative traders left to set up their own shop – still had access to banks capital on loan – was still ongoing with the regulation's implementation – kept having delays 2017 - the IMFs top risk official said that regulations to prevent speculative bets are hard to enforce due to the ways around the regulations Background to this rule and what has occurred over the past few years up until the end of June this year Origins date back to 2009 - Volcker proposed a piece of regulation in response to the ongoing financial crisis - due to the largest banks having accumulated large losses from their proprietary trading arms that could have sunk the rest of the bank if not bailed out Proposal aimed to prohibit banks from speculating in the markets using capital reserves and own assets December 2013 - five federal agencies approved the final regulations that make up the Volcker Rule—the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission and the Securities and Exchange Commission (SEC) went into eff

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question comes from Mario. "Loving the podcast on the central banks. I have a question about purchasing gold as part of my investment strategy. My core investment strategy is to invest in high quality stocks that pay a consistent and growing dividend however recently I feel that gold and silver as a hard asset are important. I know Warren Buffet advocates against the purchase of gold given its an unproductive asset and doesn't generate income. I like the idea of having a hard asset that is tangible and acts in direct contrast to my equity portfolio however I know this may come at the opportunity costs of income and growth generated from equities. Do you think holding physical gold or gold in an ETF is a good idea? Why or Why not? Would love to hear your views. " Today – how gold works in a portfolio for capital preservation – methods of buying it and look at performances in portfolios Allocation as a hedge for a financial meltdown - should preserve capital, withstand market volatility, and provide diversification across a portfolio Gold and silver – an asset which is virtually permanent, with no significant erosion of quality over time, could arguably be considered a safe haven – good evidence that Gold has provided hedge again collapse – limited supply at about 1.5% p.a. increase What is Gold true role – Capital preservation – but also Money – Base money for most of history - 1912 when J.P. Morgan was called to testify before Congress. Congressman - I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not? JP - A control of credit? No. – Congressman: But the basis of banking is credit, is it not? JP - Not always. That [credit] is an evidence of banking, but it [credit] is not the money itself. Money is gold, and nothing else. This is very interesting – our money now is credit – Fiat – not backed by gold This is Why people buy Gold – protect from these outcomes Also has many other uses including jewellery, electronics, dentistry, medical and other industrial use – and of course investment. Jewellery is the single-largest individual source of demand – 40% is investment purposes – bars, central bank reserves, ETFs Reasons for buying gold – Seen as safe haven when economy tanks fear of an economic crisis or inflation outbreak fuelling public demand; Gold has historically served as a hedge against a declining US dollar and rising inflation price of gold often moves in the opposite direction to the US dollar - reflecting the fact that many regard the yellow metal as an alternative currency a change in the sovereign wealth funds asset composition, such as demand from China, to diversify their holdings; and negative bond yields losing their appeal as an effective hedge against equities. If Aus starts QE – gold goes well Financial System - "Race to the bottom" fuels global demand for gold Why is gold and silver good? Limited supply – Paper money today has potentially unlimited supply – at the Central Banks discretion Government has debt in the trillions, Australia, the UK and most of Asia (other than China) are all up to their eyeballs in debt Came from getting the money printed by issuing a debt instrument (bond) for the cash – but they also have to pay the interest back as well Over printing creates pressure on the currency, increasing volatility. Demand – If people buy gold, the price goes up Supply is limited – you have to actually go and find the metals, and get them out of the ground, there are not many new sites being found. This is why they are considered 'inflation proof', retaining real value compared to fiat currency How to gain exposure – 3 major ways Gold ETFs – Through ASX – Few to choose from Gain exposure to gold pricing – buy ETF share, then represents an ownership in gold -not same as direct This works to hedge a portfolio based around price movement – easiest way to gain exposure to gold/precious metals - Physical Gold – done through dealers or private companies Storage - Hiding it under the mattress or arrange for secure storage - comes with its own associated costs Bonus of this – hold an asset you can store outside of the banking system with a private company Best way to preserve wealth during times of financial turmoil. holding physical bullion risky—and it can be - stolen or even melt in a house fire - requires adequate insurance can purchase and store physical gold bullion using automated platforms Gold mining companies/ETFs Another way of getting exposure is to invest in listed companies with exposure to gold. Australian-listed companies include large, long-life gold miner Newcrest Mining (ASX: NCM), and mid-size gold producer Regis Resources (ASX: RRL) – both of which currently screen as overvalued by Morningstar senior equity analyst Mathew Hodge. Unlike other vehicles, stocks can provi

Welcome to Finance and Fury. The future landscape of superannuation – the rise of megafunds through compelled mergers Numerous bodies, including regulators and government, have been keen for superannuation funds to merge The merging of several larger superannuation funds are currently underway creating so-called mega funds. On the flipside, there are smaller superannuation funds, particularly niche funds who focus on areas such as ethical investments, that are holding out against the pressure to merge. This episode – we will focus on the issue of mergers in superannuation, where it can bring benefits and where it cannot – implications for the future of superannuation The consolidation of superannuation funds is primarily being driven by APRA and superannuation trustees - believe such moves can improve the super system and lead to better outcomes This belief is supported by findings from the Productivity Commission (2018) review of the efficiency and competitiveness of the Australian superannuation system. Three findings pertinent to mergers were: Compelling cost savings from realised scale have not been systematically passed on to members as lower fees or higher returns. Much scale remains elusive with too few mergers. Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including product proliferation). Many funds lack scale, with 93 APRA-regulated funds — half the total — having assets under $1 billion. The default segment outperforms the system on average, but the way members are allocated to default products has meant many (at least 1.6 million member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement. APRA – Academic study conducted - found that generally members benefited from being in larger superannuation funds for three reasons: Larger not-for-profit funds provide diversification benefits of investing in more asset classes including unlisted property and private equity. Larger funds avoid the scale diseconomies in investment returns documented in studies of equity mutual funds. Larger funds make substantial savings by spreading fixed operating costs (such as IT infrastructure) over a larger asset base Projections – Major areas – APRA: Corporate, Industry, public sector and retail – the SMSF which is ATO The number of APRA-regulated super funds in Australia is set to shrink considerably. In its Super Insights Report (2019), KPMG estimates APRA-regulated funds will fall from 217 to just 85 in 2029. Corporate funds will fall from 24 to six; industry funds from 38 to 12; public sector funds from 37 to 15; and retail funds from 118 to 52. the number of SMSFs is projected to grow from 596,225 to 770,759 by 2029. Australia's super assets have ballooned to $2.9 trillion as of September 2019, making it the world's fourth-largest retirement savings pool. The nation's super assets are forecast to more than triple to $10.2 trillion by 2038, according to Deloitte's recent report - Dynamics of the Australian Superannuation System According to Rice Warner's Superannuation Market Projection 2019report - within five years - the industry will be dominated by nine funds controlling $1.7 trillion includes a merged QSuper/Sunsuper with $350b of assets, AustralianSuper with $325b, AMP with $200b and UniSuper with $150b. Looking forward - When combined with the strong growth of super savings to $10.2 trillion by 2038, these megafunds will make super funds an increasingly powerful force in corporate Australia, particularly in listed markets. If funds continue to hold a similar allocation of assets to Australian shares as they currently do, Deloitte says they will "dominate the Australian Stock Exchange holdings" and estimates the proportion of the ASX owned by super funds will almost double to 60 per cent by 2038 Beyond what the productivity commission mentioned - Why merge? Outflows and sustainability – Net cash outflows The aging population is another reason that there is pressure to merge. As the demographic of a superannuation fund's membership ages, there will be an increasing level of outflows from the fund. According to KPMG (2019), in 2018 one-third of funds were in an outflow position, while the median fund retained approximately 17 cents in every dollar received. Sustainability of superannuation funds Of course, outflows need to be at a sustainable level and APRA is concerned that this may not be the case for many superannuation funds. Liquidity issues – super funds with outflows may struggle Increasing the scale of the funds due to the size of the super - The benefits of scale can include: lower per member operating cost (for example, the cost of developing technology can be shared over a greater number of people) more influence to advocate on behalf of members – more powerful companies - Issues - Best interests duty of what is in the members actual interests or the superannuation fund

Welcome to Finance and Fury, the Furious Friday edition. Last Furious Friday episode – started on a thought experiment – looking at the reversal of the trends in Monetary policy - who knows if these would work and make for a better economy – these were: Separate commercial and investment banking Remove reliance on a debt fuelled economy – reforming central banks to remove inflation targeting as a monetary policy All of these are at the monetary Level – solution isn't the monetary policy solely – whilst I think that most monetary solutions are a major part of the problem - This week – we will be going through the fiscal side – or governmental or regulatory side – Focus will be on Supply Side Policies help encourage investment and spending at the business level because interest rate cuts are ineffective in boosting spending and investment alone – especially if firms are too reluctant to invest or consumers are stuck paying back higher levels of mortgages – instead they have been taking on more debt which hasn't been fuelling economic growth as theorised – as debt hasn't been used productively – due to low opportunity cost for interest rates Issues with the economy are structural areas – on the fiscal side in this episode – looking at: Reverse the trends in regulations and increase supply side thinking Enforce anti-competitive behaviours – i.e. monopolistic practices To start with - Reverse the trends in regulations and increase supply side thinking Supply side thinking and deregulation go hand in hand - provides another way of thinking about a solution to depressions or underperforming economy – rather than increasing the money supply even further in an aim to boost spending – which is demand side - Supply Side – all about boost domestic demand by cutting taxes and reducing regulations – Aim is increasing the supply (companies) and making the job market more competitive – allowing greater number of companies demanding workers – over time should help to increase wages and spending = economic growth – not trickledown economics – which doesn't exist - covered this in an episode in the past - The Myth of trickle-down economics – originally a term used by journalists and Democrats to discredit these policies – but repeat something false enough and it becomes the truth Summary of why this theory may work better than the demand side economic theories that have determined governmental policies – problems with demand Keynes -stimulus to boost aggregate demand is only really effective in relatively closed economies (why they tried tariffs back in 1930 – made the economic slump worse though) In the modern economy – with free capital flows, freedom spending and globalization = made most of the stimulus has been in fact relatively ineffective Money can flow off shore – or individuals may not spend domestically when given stimulus checks Created a situation where the multiplier effect has been small - indeed negligible - and the stimulus economic effects have been rather poor Especially when debt funded – so these policies can hardly be justified - I don't think the answer lies in yet more Keynesism, anymore than it necessarily lies in printing yet more money But yet Governments are getting more debts to stimulate the economy - old Economists still love this idea – But how is this money ever repaid? Not their problem – dead before bill is due Meant to boost business demand because people on average have more money – all it has done is fuel house prices – as lending is going towards this Screwed the younger generation – and is having diminishing marginal returns to economic output as debt levels grow What is a potential solution? To look at reversing the trend – looking at the supply side and removing the thought of reliance of governments for economic growth Doesn't aim for artificial boost of demand – but create real GDP output growth that is sustainable (not just inflationary from increase in prices through expanding money supply) Solutions to problem We need to look the structural causes of the underperformance of western economies right now And we have to bear in mind that the one reason the economic growth is sluggish is not just that there is a lack of aggregate demand, there are three other major problems. One is the problem of uncertainty and lack of confidence in the business community, which is stopping cash rich firms from investing within western nations – also with low interest rates – they get lots of debt and do share buy backs at the large corporate sector The other is the serious competition from the Asian end of the world and that competition makes it very hard to create jobs and increase wage growth – especially as regulations in each country is no equal – incentivised companies to more jobs offshore Massive companies turning free market competition into more monopolistic competition – this undermines the whole system of supply side Solutions to these problems are structural rather than what most in the

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question is from Shaf – "I would like to get your opinion/analysis on Australia's ageing population, and investment opportunities that are linked to this segment of the market. For example, companies like CGF or publicly listed aged care providers." Great question – This style of investing is along the lines of Thematic investing Thematic investing involves creating a portfolio or investing in companies involved in certain areas that you think will generate above-market returns over the long term All based on Themes – which can be based on a concept such as ageing populations or a sub-sector such as leisure Thematic can be any theme – green energy, AI or technology Aging population has been a big one for a while – first saw it come into mainstream in late 2010 Because of Australian and western nations aging populations - many developed nations are facing an ageing population - While the issue might pose some economic challenges- it has been thought of as opportunities for companies and investments into those companies "demographic time bomb" – what does it look like 1950s - across the globe, there were on average 12 people in the workforce to support each dependent. By 2050, this ratio is predicted to contract to roughly 5:1 Ageing populations are driven by increasing life expectancy and falling birth rates - typically seen in nations that have held 'developed' status for several decades In Australia – ABS data - currency 100 workers in the population for every 50 dependents By 2066 -Australia's population estimated to be 50 million, there may be as many as 70 dependents for every 100 workers projected that the number of Australians aged 65 and over would more than double by 2055, compared with 2015 by 2100, it's estimated that there will be more people aged 100 or more years than babies born in that year This demographic shift will see the public purse put under increasing strain, as a greater share of the population exit the workforce and become reliant on the government for care, medication and housing But the question still remains – is there opportunity for investors to profit from this trend? Yes and no - Keeping an older generation fit and healthy requires significant investment in certain areas such as healthcare and technology – so having some exposure in your portfolio to stocks tapped into this sector and their healthcare counterparts, may make sense – but what areas can be invested in and how to do it? This isn't advice – not taking personal situation into account – Major areas that may benefit – asset managers, healthcare, pharma, age care, biotech and leisure companies Side note – these predictions and forecasts on aging population demographics are long term – numbers by 2050 – and require steady growth – don't think of this as a quick investment trade to make money - come back to this Health care - The health caresector is the most obvious beneficiary of the ageing population trend. greater population of older people, there is naturally an increased demand for health care services, equipment and supplies. Deloitte analysts predict spending on healthcare will grow around 4.1% p.a. – Growth rates forecasted above GDP growth – so if this continues the right company could beat the market also government health expenditure is expected to reach 13% of GDP by 2049-2050, up from its current levels of around 7%. demographic is likely to have implications and opportunities for investment markets Pharmaceuticals - the pharmaceuticals industry will see sizeable growth as the median age shifts towards later life Studies in the US showthat 75% of individuals aged between 50-64 use at least one prescription drug regularly – same study shows that this figure rises to 91% for 80+ age bracket. This is paralleled by the dramatic increase in the number of drugs consumed by older people the 50-64 bracket in the US held prescriptions for around 13 medicines, this number rises to around 22 for patients in the 80+ age category These figures, when put into the context of an ageing population show decent long term prospects for drug and medicine producers – especially with the thematic of medical industry in general – more profitable to treat symptoms than cure Side note – medicinal cannabis on the pharmaceuticals scene are the growing - a range of pain relief and alternative therapeutics Aged-care - Retirees' living arrangements can also change as they age - move into retirement villages, then shift into residential aged care when their ability to look after themselves diminishes If this trend continues = see an increase in demand for residential aged care – so the aged-care industry is also one that should benefit from the ageing population and rising spending – this sector it is well-represented on the stock exchange But has its problems – more recently suffered from recent negative publicity concerning care practices, culminating in the annou

Welcome to Finance and Fury What is important when it comes to investing? Or which is the more important – what you know or what you do? Sometimes the more you know – the harder it is to invest – information overload – can be a curse of knowledge – if you knew nothing but over the past 20 years just bought index funds – better off than if you knew everything (which nobody does) but never invested a single dollar – In this episode – talk about Investing actions – over knowledge Obviously, knowledge helps – helps you plan and know which actions to take – but the actions that you take can make the difference between Financial Independence or Financial dependence Taking action versus theory – why? Well even sometimes fundamentals aren't important – the knowledge of fundamentals Even at the moment - The current market gains – even against a backdrop of deteriorating economics and fundamental news and data – this is certainly a worry – but it does make sense with Central Banks furiously flooding the system with liquidity So the risk of using knowledge is essentially fighting the Fed – and that is a losing position Market has a pavlovian response to the Fed now – Something that I have learnt more during the past few months This podcast – provides lots of theory and hope I am providing knowledge – important to not get bogged down in this solely – needs to be practically applied – However - On mass – I can tell everyone what to do – as that wouldn't be right – one solution doesn't meet everyone's needs – would be irresponsible – but you can use strategies that you learn to practically apply How to start taking actions – process of how to build you own Simple Rules to live by Life has to be an iterative process – Iteration is the repetition of a process in order to generate a sequence of outcomes. The sequence will approach some end point or end value. Each repetition of the process is a single iteration, and the outcome of each iteration is then the starting point of the next iteration Take actions and learn from them = what doesn't work change – what does work keep doing – demonstrable actions is important Do more of what works and less of what doesn't. Use your knowledge to build rules – over time You will build additional Rules – and these will help you make action – keep the process going – action after action Takes some time to get rules in place – then action can flow Set goals and be actionable – it sounds very simple – but there are steps involved Always remember - You are investing in your future – have to put goals in place Need to know where you want to go to get there – Actions – if you were going to take a road trip – planning and actions You can know where you want to go but unless you get in the car and drive you aren't going to get anywhere Won't run through goal setting – but there are workbooks and tools in the members section of the website if you haven't got any or need help – financeandfury.com.au You can negotiate with your future self – and your future wealth - Be actionable about it – if you want it, you can get it - Start now and never stop – The future catches up on you – just have to adjust course Earlier you start the more you will have – the more actions you will take – the more you will learn – the more your future will thank you When looking at goals - Think long term and big picture - Think about what your future looks like What you want to do, and how much you need to do it Rule of 20 – Plan to get a 5% income off investments - E.G. - $100,000 = $2,000,000 asset base If you aren't sure what this looks like – Work it out Need to have a plan in place as it is hard to work towards something that you don't know Invest well and don't lose money repeatedly - Taking appropriate actions – first step is to watch out for taking too much risk – but also not enough Normally the thought when it comes to investing and the risks associated are that you are going to lose money – normally the first thing that comes to mind But there is another major risk in investing – losing money by not investing – sounds weird but you miss a good future opportunity through sitting on the sidelines through your life – i.e. holding cash long term So you can eliminate either one, but you can't eliminate both at the same time Need to take some risks for rewards – but how do you position yourself between the two – by taking the right actions - Caution is important – but taking actions over time will build investment maturity – but any investment discipline that you build over the years does not work if it is not followed Remember that losing some money is part of the investment process – I have lost plenty of money over the past 15 years of personally investing – but I have learnt a lot for them – they are expensive lessons It comes back to managing risk and volatility important to have a process that can mitigate the risk of loss in your portfolio- if done right - does this mean you will never lose money? Of course, n

Welcome to Finance and Fury, the Furious Friday edition. Does the Government need to solve economic problems? Do central banks solve economic problems? If so – how? These are honest question that do need to be thought about - there seems to be this growing thought through western societies that the answers to both are yes. That individuals are no longer capable of making their own decisions or choices in the economy – and it is up to a higher power But yet- if we are left to our own devices, would we solve the problems of the economy over time through our voluntary choices? Going to the extreme examples - If more money redistribution to the people from Governments, or increased government controls over the economy worked so well – then socialist states should rock People would be clamouring to get into these nations – not get out and go to nations with a freer market – which simply means greater freedom of choice when it comes to economic activity – The flight from socialist countries and the better quality of life in economically free counties has been the demonstrable trend over the past 100+ years – But whilst you can do a bit of digging and see this – socialist nations do sound great – having governments control the economy and provide everything to people does sound attractive to some people - might sound good but in reality when something goes wrong – there is no free economy left to solve it – no individuals to make voluntary transactions or start a business reliance on the government is all that is known or allowed – so to get out of any economic worries – more of the same is turned to – with increased gov spending or taking over control of more of the economy – which tends to compound the problem In western economies - Most economic problems as I see them stem from the trend of increasing regulation and additional controls over our lives that the Financial System plays – Even government regulation that is meant to do good can go wrong The very nature of the global financial system is moving down the trend of additional control over the economy No inflation? Drop interest rates. No GDP, increase government spending. This episode will be a thought experiment – looking at the reversal of the trend – I'm just one man – who knows if these would work and make for a better economy – These are just my thoughts on reversing trends which have resulted in a fragile and skewed economy – probably missing many problems with these solutions – due to the orders of effects from actions – There are four major structural areas of the economy that need fixing through reversing trends over the past 100 years – falling to the fallacy of the intelligentsia of only having no external feedback loops for ideas – but it is fun to think about so here we go Separate commercial and investment banking Remove reliance on a Central banks fuelling a debt based economy – reforming central banks to remove inflation targeting as a monetary policy Reverse the trends in regulations and increase supply side thinking Enforce anti-competitive behaviours – i.e. monopolistic practices Big topic – so split this up into Monetary and Fiscal policy – first to points in this episode – last two next week Separating commercial and investment banking – the interconnected nature of the financial system This used to be the way things worked – - where you have a bank you put money with and borrow from – and another that invests in speculative positions - talked about this in the episode "What has created a system where the share market can go down so quickly?" and a number of episodes in the past In summary – In the US – thing called the banking Act of 1933 – one part of this was the "Glass-Steagall" section of the act - forced the absolute separation of the productive banking from speculative banking Commercial banks were considered productive – Under this act in 1933 – introduced the Federal Deposit Insurance Corporation (FDIC) – only on those commercial banking assets associated with the productive economy Created a system where speculative losses arising from investment banking to be suffered by the gambler Worked well for a while – then there came the first mass wave of deregulation – While Australia has previously not enacted specific Glass-Steagall legislation – we had Commonwealth regulations which effectively imposed many similar restrictions in place until the deregulation of banks commenced in the 1970s and 1980s These were minor to the major onset in the areas of Deregulations – Two major financial centres of London (UK) and New York (USA) London - 1986, the City of London announced the beginning of a new era of economic policy – known as the "Big Bang" deregulation - swept aside the separation of commercial deposit taking and investment banking in the UK the "Big Bang" set a precedent for similar financial de-regulation into the "Universal Banking" model in other parts of the western world – allowing investment banking to snuggle back up t

Welcome to Finance and Fury, the Say What Wednesday edition. Last part of a 3 part series from Ryan's questions – looking at alternative future investment strategies Episode two weeks ago – went through debt jubilees – Last week went through policies and how these have affected asset prices This episode we will be focusing on alternative investment options – such as crypto – thinking outside traditional investments like shares or property when it comes to future investment strategies Before we start - Hypothetical question – what has more value – A litre of water or a new 60" flat screen TV Depends on your situation – and perception of value Most people would say a new TV would be more valuable – as the monetary cost is maybe around $1,000 – water out of the tap is a fraction of a cent – based around that situation – monetary only – TV is better – but what if someone is dying of thirst – water is more valuable – what if in a hypothetical situation in the future – electricity is gone – TV would have no use then and have no value Price is not value - All assets can be propped up on prices – overdemand – hand sanitizer or toilet paper Why determining the value of an investment to you is important Before looking at alternative investments – have to ask the question: What is your purpose of investing? That is where you can get value from Need to narrow it down – can't just be something generic like to make money – or become wealthy Is it for passive income – if so, you need to invest in income paying assets Is it to accumulate wealth – if so, you need good long term growth and diversification to help protect from downside volatility – As if you are after something that gains wealth long term - then it Cant be extremely speculative – if goal is to accumulate wealth – and put it into something that only has value due to confidence – can create a situation where your goal is failed -loss of value – in addition – extreme political risks exist with some asset classes – Each traditional investment is Within the 'system' – this can work for people as this system protects its own - through laws – but depending on the type of asset you purchase - this can work in your favour or against you – For instance - can the investments that you are planning on purchasing be banned Will the law protect you if something illegal is done in the investments you hold? This relates to – Crypto – Done many episodes on this in the past – most were last year –older but still relevant - check out Is Bitcoin the future of money? If the future of money is crypto currency, why might Bitcoin be a trap? The BIS versus BTC – What are the plans to replace current crypto currency markets? – Central banks works on Crypto and legislation pieces Ryan's made mention of this question – he said "From this point of view I am thinking that bitcoin or cryptocurrencies that can't be 'printed' as such out of thin air and gold to a certain extent will continually rise in the future until something occurs along the lines of the government contravenes and makes policies that forbid people to hold gold or cryptocurrencies" Two major points here – the supply of an asset and the political risk For supply - True that Gold cannot be printed out of thin air – but synthetic versions of it can based around futures contracts – also the price of gold can be set by monetary authorities – Example – to be a money base $10k as a price level is what some like Jim Rickards suggest Also – some risk of fake supply – few months ago 82t of gold was found to be fake – copper Each crypto can be capped in supply – but they are exactly printed out of thin air with 1s and 0s – through process of mining – which becomes harder as each token is completed According to crypto market capitalization aggregators, thereare more than 5,000 cryptocurrencies in existence today and over 20,000 different types of markets Going deeper is bitcoin/crypto as an option? The valuation side to it is interesting - what do you value BTC in? Is it AUD? Or USD? Think about that – is it really a new form of money if it is still valued in current currency – not in relation to good themselves Fractal version of fiat currency – you need fiat money to start with to purchase under current economy Currencies need reserves to lower chance of going to zero – without something backing it (other currencies, gold, etc.) – no perceived floor in panic – beyond this – confidence is the most important factor now How do we value currencies? Subjective theory of value – what is the value? What we can use money for – and have confidence in – This confidence comes from the ability to use it as a medium of exchange – can go buy things with AUD – need to convert back from BTC to AUD in most cases for a purchase Perception of value is important – what creates this Reserves and Gov decree - provide lots of subjective value in Fiat – lots of confidence – until there isn't Seen currencies suffer massively under this – even with safety me

Welcome to Finance and Fury. Today - Understanding domino effects within an economy – This episode is aimed to help think more about orders of effect and consequences from actions – Talked about this in last FF ep – this episode is a bit of a lighter episode – been talking about heavy theory for a while Purpose of this episode is to help explain the working of the real economy - expanding on a thought experiment to help you understand the difference between government policies – that promise the best – but can deliver the worst – It is fun to do and helps to expand thinking and understanding of the economy – and how we are the major driving factor behind the economy – how are we the driving force? It is based around our choices - and that what most policies do is just get in the way of choices -either directly or indirectly – and this can disrupt the economy from maximising itself – which is us making optimal choices Every action has some consequences – good or bad Can happen everywhere – in nature – say there is a river – it gets diverted – then this floods somewhere else how policy can act as a diverting factor and always have consequences – Most people are familiar with the concept of a consequence – to start with – think about your personal situation and consequences In your Individual situation - this is relatively simple compared to consequences of policies - still complex the further you take the consequences of actions out – however – less variables in the individual situation Have to worry about opportunity costs to decisions – Looking at your own situation – actions have consequences – those that occur in the instant - But also long-term consequences – relative to your own environment – Example - Change a household policy in financials – spend $20 less a week on coffee – That is the action – what are the consequences - In your own life you might be better off financially – may have less caffeine unless replaced with an alternative cheaper substitute Financially – the outcome is dependent on your action on what you do with the funds and over what timeframe – in one year you might save $1,040 Pay $1,040 of mortgage off – would save an additional $20 in interest at 3.5% in first year Invest in something – wealth growth of $1,040 – might walk away $42 better off in the first year if it earnt 8% - total of $1,082 What about over 20 years? Mortgage – paid off $20,800 of mortgage but saved $9,310 of interest – investing would be around $51,310 in total value better off This is just one simple example – but you can do this for a lot of other actions that you take – even if you cant place a dollar value on it – like spending time with family - Either way - Being aware of your own actions and consequences is an important first step – Now let's expand this out to the macro – that business has $20 less in revenues this week – That is about $1,040 p.a. less for this company each year – this isn't a major deal long term – if they are losing one customer – they can survive this – But expanding further –on average let's say they have 200 customers each day – 25 per hour for 8 hours - Average customers/number of sales per week – 1,400 - average price of coffee is $5 – $7,000 revenue per week or $364k p.a. say that 60% of customers go – they are only earning $2,800 p.w. now – or $182k p.a. – doesn't sound bad? Well - what about the costs - Wages per hour – major cost – rent as well – also inputs for making coffee Wages – Say 3 employees – each earning $25 per hour – minimum wage but with the casual loading - $600 per day in wages – assuming working for 8 hours Rent – say $25k p.a. so about $70 per day Product inputs – milk, coffee, cups – $1 per coffee in costs - $200 per day Total costs p.a. = $240k costs at a minimum What does a business have to do now – cut back on costs - The coffee shop would have to cut back on the purchase of these inputs – cut back on staff wages – has to find $60k of cutbacks to even break even – but even more for the business owner to make a living off But this also has its own flow on effects - which is less demand for those businesses who were selling coffee, cups, sugar, milk etc – Coffee company that produces and packages the coffee to sell to the shop– would have to buy coffee – have equipment and plants to roast and process – has employees – so has their own costs and revenues to worry about – same for the company selling milk – who gets this from farmers - This is one relatively simple example of just one coffee shop and the flow on effects – to Help your personal understanding about the economy – and investing as well – as it helps to show which businesses may not fair so well when one industry is impacted heavily by policy If anyone listened to the Episode a little while back on how we are the economy – this is relevant – Taking it a step further – the companies that supply this coffee shop – not a big deal if one of their customers has to cut back or goes out of busines – Simila

Welcome to Finance and Fury, the Furious Friday edition. Today is more a Say What Wednesday episode, I need to catch up on some of your questions and this one fits in nicely. This is a question I got from Ross about rethinking monetary policy. "Am currently reading Stephanie Kelton's book the deficit myth. As she is a proponent of MMT Explaining her perception of debt inflation. And the role of government in the way money is distributed in the economy. As well as the way taxes are used to incentives behaviour rather than just a means for revenue. She makes a point that when nearing low unemployment, wages should rise and then consequentially so should inflation. She argues that the feds decision of how much slack should be allowed in the economy is often misguided, and basically says that monetary economist demand that unemployment is necessary. Which leaves a winners and loses overview of the overall economy. So to ensure we don't pay too much for anything people have to be unemployed. How can this be morally justified and is the opportunity as she argues to reach full employment while having our parliament along with the federal reserve better utilise issued currency and taxation schemes to manage the rate of inflation so that people aren't left behind? As we have seen in the US unemployment was like 4% yet inflation remained low. How do you explain this phenomenon and is it perhaps time to rethink monetary policy around the developed world?" This is a great question – lots to run through Role of Governments in the economy – and role of CBs The theory of unemployment and if it is necessary or not – and who the winners and losers are I am familiar with Stephine's work – havent read this book but started seeing her name pop up in researching MMT also following politics – Bernie sanders economic advisor At the core of this concept – Theoretical framework in political economy – called public choice – The founder James Buchanan – think about politics without romance – this means looking at the actual effects of a policy as opposed of idealistically assuming that we will end up with the kind of perfect outcomes promised – as they only exist in people's imaginations No policy is perfect – system is complex – due to it being complex there is no algorithm or model to predict what will happen outside of the potential of a first-order effect – Basics flaw of any policy decision making Michael Munger – calls this unicorn Governance – its not enough to judge a policy or a theory by its intentions – or by what you hope will be the end result – you might get what you want initially – but could have bad long term effects – Concept of Second-Order Effects – actions have an intended consequence (outcome) - each consequence has another consequence, and so on. Thing that is forgotten about in Governments – As the second or third consequences only appear once they leave office dominoes—1000 lined up, one tap causes a chain of events to occur - Once it starts - difficult (if not impossible) to them all falling down For instance, the view of taxes are used to incentivise behaviour rather than just a means for revenue has been proven to be ineffective. For example, when they are used to influence behaviours (like tax incentives for "going green") and reduce the incentives for others (e.g., taxes on tobacco and alcohol), the end result in most cases has created a taxes on the poor. Make prices high on those goods – which are disproportionately spent on by those in lower income brackets – Similar to the alcopop tax – did it reduce peoples drinking? No people just bought a whole bottle of vodka In addition, the notion of taxes being used to help curb inflation is a method of indirect pricing controls – has second-order effects Example of price capping – Cap Electricity Prices – outcome is flat prices (whatever regulators decide) First Order – Electricity suppliers set their prices to the cap price Second Order – Electricity supplies (companies) revenues may decrease – Especially over time with increase in their costs – (wages, transport costs, inputs into electricity like coal) Third Order –- The share values start to decline as investors flee for fear of limited future potential returns Fourth Order - Profits begin to fall for the energy supplies costs go up but prices are capped Fifth Order – Share values begin to plummet – reducing the capital the company can raise – reducing 'Capital Expenditure' CAPEX – What companies spend on large projects to grow the company – Energy company – Origins Gladstone pipeline – billions of dollars spent on upgrading for energy needs – Gas – a lot cleaner than Coal Sixth Order – Companies begin to have to let employees off, reduce maintenance on the infrastructure, and so on. Sounds a bit far-fetched – but it happened in California in the 90s – in RSA - happens across all things Rent control in NYC – After WW2 - provide returning veterans with affordable housing - so city's housing commission capp

Welcome to Finance and Fury, the Say What Wednesday edition. Policies that governments and CBs have implemented that affect asset values Relates back to Ryan's investment thesis - As a millennial I understand that the government has to do their best to keep the ageing baby boomer asset prices (predominantly US share market and Australia property) high so they don't have to fund them in retirement through pension- though I am not sure I am that interested in paying top dollars for these assets in which puts me right out there in the risk curve for not a high enough potential return. Go through monetary policy and how this has affected asset prices – and how it will likely continue to do so Reasoning for policies that have inflated asset prices - Not for the reason of pension funds - Not sure about the government not wanting fund pension – They aren't funding them – we are with tax money – there is no asset sitting there to fund it – If They are trying to keep asset prices high – it is for the wealth effect – spending effects due to confidence Or for their own wealth – financial disclosure for the fed board came out and they are all multi millionaires with trusts and investments into indexes and shares that suspicious benefit like GE Also politically expedient for the larger chunk of the population – keeping the largest group of the voting public happy – or those why pay them the most in the way of lobbying Property – most people live in this and cant fund their retirement off it – land restrictions and taxes haven't helped Look at traditional assets – for investment Strategy in places i.e. can't beat them, join them - However – monetary policy is not fiscal policy – Governments are directly keeping a lot of asset prices high – Monetary policy from CBs has a greater effect – lets run through them one by one Cash itself – in times of uncertainty or need of liquidity is king – but not a good asset class – shouldn't be seen as an investment – it is a medium of exchange infinite money-printing will eventually destroy fiat currencies – by when? Why knows – With the acceleration of printing it may be far quicker than might be generally thought This final act of monetary destruction follows a 98% loss of purchasing power for dollars since the London gold pool failed – established in 1961 under the Bretton Woods system – but lasted less than 10 years with France first pulling out in 1968 - and then the gold window fully collapsing in 1971 And now the Fed and other major central banks are committing to an accelerated, infinite monetary debasement to underwrite their entire private sectors and their governments' spending, to prop up bond markets and therefore all financial asset prices Have to rethink inflation theory - Inflation of prices – not goods inflation is commonly presented by modern economists as a rise in the general level of prices – based around theory this is correct – but misleading Going back to the pre-Keynesian definition - inflation is an increase in the quantity of money which can be expected to be reflected in higher prices Expected to be reflected in higher prices – important the expected part – as it is theoretical as the effects on prices can be a number of different factors Split into two categories – prices of consumable goods -and prices of other assets – shares, property and bonds For price inflation of goods - The effect of an increase in the quantity of money and credit in circulation on prices is dependent on the aggregate human response. In a nation of savers, an increase in the money quantity is likely to add to savers' bank balances instead of it all being spent - in which case the route to circulation favours lending for the purpose of industrial investment – this was historically the case Product innovation, more efficient production and competitive prices result; and a price countertrend is introduced, whereby many prices will tend to fall, despite the increase in the money-quantity. Banks used to need savers – but not anymore – have capital notes and investors – along with Central Banks to provide all the funds – plus – there is no free market for interest rates due to competition between banks for your cash now When you don't need savers – you can have very low interest rates - Trends for higher levels of household debt which then takes away from savings further Which lowers people's ability to consume domestically – and need more imports from other countries where goods are produced more cheaply – this has a deflationary effect on goods On the other hand – Asset prices increasing can be a by-product of increased level of money – money created through credit (or debt) has to flow somewhere - Now the breaks are off when it comes to additional credit being produced – means more money into the system – If this goes to main street – may see inflation in consumer goods – helicopter money policies If this goes to wall street – which most is – will see inflation of prices – Regardless of

Welcome to Finance and Fury. Investing in the equity or debt markets in the world with greater levels of Central bank interventions – The rebounds of the market – seems to be responding to the Fed and the US Treasury Last week – the ASX recorded its biggest one-day rise in two months – the market hit the 6,130 mark and then took a tumble – went down to close to 5,700 – then rebounded – this rebound seemed to be after an escalation in policy support from the US Federal Reserve was announced In one day -the S&P/ASX 200 Index surged 222.5 points – or just under 4% - biggest one-day gain since early April This brought an end to the start of a sell-off trend – previous 3 trading days reduced the market y 7% - since then been hovering around the same level This episode is to explain why this is the case – and how the Central Bank involvement in the markets going forward can sharp large rebounds in the markets – and provide a false confidence for investors – especially those with an appetite for shares and assets higher up the risk curve To start with – think of the market at the moment as a ball on a hill – The hill itself is the potential for upwards and downwards movements of a ball - The ball itself is the price of the market Someone kicks the ball up – it going up – loses pace and then starts to roll back down – but then the Treasury and the Fed are standing there ready to kick it back up – and repeat this process – how? Expanding their powers to get further involved in the share market – or the game of kicking the ball – through The purchasing of corporate bonds Last week – the Fed said it would begin buying corporate bonds directly off the market – this is one of the more significant policy developments from the central banks since QE was introduced in 2009 The intention to expand asset purchases to include corporate bonds was first unveiled by the Federal Reserve at the end of March – officially implemented for the first time at an expanded capacity last week I covered this topic though back in February – in an episode called "What Central Bankers may do in the next financial collapse" - although the central bank was yet to put the plan into action at that time – it was just simply paying attention to what they were saying they were going to do – Previously under QE – The problem for the Fed alone is that it is only allowed to purchase or lend against securities with government guarantees these are assets like Treasury securities, agency mortgage-backed securities, or debt issued by Fannie Mae and Freddie Mac – why the Fed was allowed to buy back the worthless MBS off investment banks back in 2008/09 But they can't buy any equity or debt in companies – which would be a form of government sponsored funding mechanism for companies – However – now The Fed is bypassing the banks or asset managers to inject money into the financial system – now they are lending directly to the private sector through the purchase of their debt The Fed will now start to buying private debt, directly from companies as they go to market to raise capital and as existing bonds and other securities are offered on secondary markets The additional assets that can be purchased - this includes municipal bonds, non-agency mortgages, corporate bonds, commercial paper, and every variety of asset-backed security The only things the government can't buy are publicly-traded stocks and high-yield bonds Companies have two ways of raising funds – Through equity (more shares) or debt (bonds and notes) – the cost of this is what is important to valuations – come back to this in a minute How is this all being done - The Fed is not just buying secondary issuance - but primary issuance through a special purpose vehicle – Covered the SPVs in the episode - Crony capitalism and Modern Monetary Theory in action! What happened - the Treasury created a series of special-purpose vehicles (SPVs) A special-purpose vehicle (or entity) is a legal entity created to fulfill narrow, specific or temporary objectives. SPVs are typically used by companies to isolate the firm from financial risk – it is how property developers work with each single development – limits liability into one single entity The aim of these is to buy all manner of financial assets, backed by $425 billion in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund. an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention The Fed will lend to SPVs against this collateral which, when leveraged, could fund $4-5 trillion in asset purchases of additional assets beyond what the Fed itself could access in its mandate. Round about way for the Fed to circumvent their mandates – as even though the assets inside of the SPV may not have government guarantees, the SPV itself can In QE - the Fed moves assets onto its own balance sheet – Under a SPV - the Treasury will now be buying assets and backstopping loans through

Welcome to Finance and Fury, the Furious Friday edition. Been watching a very interesting social experiment play out – the rise of the nation of CHAZ – Capital Hill Autonomous Zone – If you haven't heard about it – it is a LARP – live action role playing for an anarchist/communist state – not really a new country or nation - Area in Seattle – about 6 city blocks – protesters have taken over a zone in the city and are calling this a decentralized state – saying that they are separate from the US gov and self-determinate in law their goals are focused on creating a neighbourhood without police initially Now that it has been going on over a week – had some time to put together more demands - a zone of rent control, the reversal of gentrification, the abolition of police and funding of community health The area is cornered off by fences and barricades at intersections – this week the city of Seattle and representatives of CHAZ agreed on a footprint for the zone – the Mayor Durkan's signed off on this – informally – she made a blog entry - reasoning for the agreement between the two parties: "The City is committed to maintaining space for community to come to together, protest and exercise their first amendment rights. Minor changes to the protest zone will implement safer and sturdier barriers to protect individuals in this area." As part of the agreement the city agreed to remove the old barriers and replace them with concrete along the new agreed-upon zone boundaries Personally – think it is fairly funny – Not for the people who live there – but a lot of great videos are coming out of naked people running down the street high on LSD, or rolling around in dirt, also likely out of their minds But this social experiment does raise an interesting topic – is this true communism? Proponents always say that real socialism or communism has never been tried – so is this it? The people running themselves in a form of anarchy where there is no state – but the economic ideas they have are more on the communist side Lets get into it - There are a million words for it – True communists advocate for a completely classless society – read the communist manifesto - initially there is socialism – where government controls all means of production and distribution of goods – Final stage is communism – Everyone owns everything with no government – no police force and the people rule themselves – The initial stages – belief that control is necessary to eliminate competition among the people and put everyone on a level playing field. Socialism is also characterized by the absence of private property. The idea is that if everyone works, everyone will reap the same benefits and prosper equally. Therefore, everyone receives equal earnings, medical care, housing and other necessities - Sounds nice Have different forms - Democratic Socialists – Believe that they can achieve this through the democratic process But once they have it, the 'democratic' part ceases to exist – Once Governments get so much power they no longer need the population to gain power – What happens then? Socialism can work – In tribes of 100 people – Everyone carries their weight – there is no welfare in these tribes - otherwise you get an axe in the back of the head Today it is the opposite – Under communism those carrying the most weight get the metaphorical axe in the back of the head first – as they create the inequality (through owning the private property) and need to go to achieve the goal – the only way to level a forest is with an axe Two ways of installing communism - Slow and stead - Fabians - take their time to come to power without direct confrontation, working quietly and patiently from inside the target governments – death by 1,000 cuts Fabian Strategy - advance the principles of socialismvia gradualist and reformist effort in democracies, rather than by revolutionary overthrow Quick and forceful - Marxists - in a hurry to come to power through direct confrontation with established governments – revolution Talked about this in previous episodes – Russia, will do another series on China and other countries as well CHAZ is a mini version of this For this overthrow to occur – there needs to be the right environment created The road to communism is paved with apathy, hopelessness, frustration, futility, and despair in the masses of people Movement that came out of hate of authority – aimed at police – which is the law enforcement arm of the state – police don't make the laws – they enforce them – so they can be the targets as they are on the front lines Perception against reality – your society can be fine – but if you think that it is unfair or hopeless – then that becomes your reality - Fidel Castro is an example of this – how perception is more powerful than reality He overthrew Batista in Cuba in 1953 - With the help of the US media, New York Times, CBS – turned Castro into a international celebrity and spread the perception that there were thousands of

Welcome to Finance and Fury, the Say What Wednesday edition. Part 2 from last week with Ryan's question – Starting to look at this - What is a debt jubilee – what are the chances of this occurring and how would this affect the economy – Dates back to biblical times - The official term 'Jubilee' comes from the Old Testament- in some parts of Mesopotamia -Jubilee Year of Leviticus 25 was based on Babylonian practice for over 2,000 years -the practice of debt cancellation, called "andurarum." When any new ruler would take the throne, the first thing they would do would be to free the personal debts – was written into Babylonian law forgive the personal debts that had mounted up - among the small holders on the land - liberate the "bond-servants" -people who had been obliged to work off their debts in labour – essentially freeing of slaves Economic states are different between now and almost 4,500 years ago – back then - the main creditors were royal families and their close supporters – either the religious orders or wealthy nobles So the cancelling of debts really only meant removing debts owed to themselves But this wasn't purely altruistic – What the king lost in immediate payment, he got back in encouraging a land holding peasantry, who could pay future taxes and provide the backbone of the army. Moreover, rivals to the Crown, foreign enemies or internal upstarts, could foment rebellion by threatening to cancel debts themselves, if the new Monarch did not do so first if there was a rebellion In times of social unrest – it is something to watch out for – a socialist politician coming in to promise the cancellation of debts In the modern economy – the fiat system – there is a lot of debt – it is a global phenomenon When money has nothing backing it – Hence why the chosen policy prescription for all financial ills is to throw more money at the problem - even if it means piling up the debt – especially when the problems are created by debt This can work when economies are growing and have very low debt levels – but when debt levels get too high and there is no growth – starts to strangle an economy Regardless of the economic effect – there has been exploding global debt -back before the GFC in 2007 – was sitting at $116 trillion USD - current levels are around $250 trillion – about to accelerate due to the stimulus packages governments rolling out debt has increased by over $130 trillion, but GDP has only risen by $27 trillion countries have borrowed five times more than their economies managed to produce Global GDP is about $142trn – so $100trn more debt than output Puts the economy in a fragile position - the risk of deflation, which means prices are falling, across the entire economy Another policy response - central banks have been lowering interest rates to fight deflation – policy makers seen as the number one threat to global economic stability Three major sectors who have debt – Governments, Companies (large and small) and individuals Governments – Makes up around $70trn of the global debts – Lead by the USA and China Large debt levels – then Rising interest rates would compound the problem – interest repayments cost a lot to a nations budget - Example in 2008 – US annual interest on debt $253 billion and consumed 8.5% of the federal budget – projections that in 2026 the interest may be $762 billion and take up 12.9% of the budget – with lower interest rates Debt-to-GDP ratios are rising rapidly - Finland, Canada and Japan had the highest increases in a 1-year period - puts countries in a vulnerable position in the event of a downturn According to the World Bank, countries whose debt-to-GDP ratios are above 77% for long periods experience significant slowdowns in economic growth – estimates that Every percentage point above 77% knocks 1.7% off GDP over the future Companies – Corporate debt is around Gov - $72trn – but almost $19 trillion dollars of debt is owed by companies that don't earn enough to cover interest payments With potential of lowering demand for products – in a bad position – but through SPVs the Fed is buying up corporate debt with more newly created debt – debt on debt Individuals – Mortgages – credit cards, car loans, and student debts – for the individual side – the debt repayment and interest costs reduce consumption – also impacting economic growth Level of credit growth was over 10% p.a. whilst wage growth was at about 3.5% p.a. These levels of debt growth without the economic growth cannot go on forever. Previous policy responses proposed – trying to get economic growth through MMT when interest rates can't go any lower and QE has already been tried – and rolling this out on steroids - a central bank's last resort is to provide relief for the common people Economies are basically reaching this point – additional payments to people The theory is that debt cancellation is needed when debts go beyond the ability to be paid, and all personal debts, all non-business debts, tend to mou

Welcome to Finance and Fury. Today we'll talk about what rules the market, fear, and why it is important to have some fears but also overcome them Fears rule the market – and the more fear makes the market more volatile Occurs on both side – fears of losing money – fear of missing out on returns Drives large crashes and drive large rallies – obviously selling and buying affect price – but the fears can be behind the behaviours of buying and selling Behaviours of the current market – Volumes are spiking on the market in trades – See a spike in volumes in large movements on ASX – March – Saw double the average in trading Been a record surge in Nasdaq volume more recently – also their equity call volumes hit their decade high – Calls – options that are essentially leveraging to buy the market in the future – works well when the market goes up At the institutional levels - Goldman's prime desk notes that while overall hedge fund gross leverage fell -2.5 pts to 247.1% (96th percentile one-year), net leverage rose +1.0% to 75.0%, the highest level in over two years Low was in April – Gross was 229% and net exposure was about 62% - so up over 10% E-Trade - reported that its daily trading volume in April was more than three times as large as it was in the same period last year – other discount brokers have reported similar figures TD Ameritrade – 3m trades a day in April – 800k year earlier One potential contributor – lowering or removing commissions – in rational terms - getting rid of commissions shouldn't have had a substantial impact Going by the numbers – say you invest $5k – brokerage in USA is cheaper than AUS – about $5 to $10 max – can get about $10 in Aus – is about 0.1% or 0.2% - saving this cost won't have much effect on the ultimate outcome How much trading would you have to do for it to make a difference? But free is always appealing – and the fear of missing out on a free lunch can be large nobody really knows what is driving the massive spike in trading - people might just have a lot of time on their hands – or as Richard Thaler mentioned - it is replacing gambling - casinos are closed and there were no sports to bet on $400bn gets gambled each year – online is about $50bn Small trader call buys up massively – average since 2000 was about 2m contracts – spiked to 12m Fears at the moment – nobody is immune Institutional fears – institutions like investment managers have lots of fears – Investment managers – FOMO – not outperforming benchmark Why? The success of their future is reliant on performance – people will withdraw funds from them so their MERs income goes down If they are sitting on the sidelines in a market rally – and underperform in the short term – bad for their longevity Individuals – Fears of missing out – or fear of losing funds - Market panics caused by overselling – market bubbles buy overbuying – Neither is based in rational but hope - Fears can be rational – why invest? Fear of not having enough in retirement or Fear of inflation kicking back in There is risk involved with investing – property or shares – or anything that has price movements – but not going to get good long term returns without risks Central Banks – Fearing deflation Can't let fears rule investment decisions Investing is an action, controlled by behaviours – emotions change your behaviours. Getting a good investment midframe allows you to invest well for the long term – not letting emotions rule your investment decisions Understanding how the market behaves can help to overcome your fears of the market though This means controlling your fear more than trying to control investments – Cant control what investments do short term Fear is an emotion – Which stops you from investing Starting is the hardest part – getting the right fame of mind and overcoming fear But staying motivated and on track is just as hard Life gets in the way – and new things happen and crashes How to start? Needs based plans – ignoring your emotions What is your purpose for investing? What are you trying to achieve? – If you don't know your reason to invest, you cant answer this Long term growth? Passive income? How will you achieve this? Strategies and investment options Save a deposit – Buy Property Monthly investing into Managed funds, LICs, rather than savings The most important thing is to just start – but fear will take over and indecision Information overload will be hard to overcome Diversified products help to remove this – ETFs = let someone else make the investment decisions for you Taking the plunge – Start small if you are uncomfortable You don't need to put everything in, but a small about Some people like to jump into a cold pool, others start with feet and slowly move in to acclimatise Example: Like a pool of investments, some people do dive heard first into pools, but what happens when they cant see the bottom, or cant swim? If they break their neck or drown, would people say that pools are dangerous, or the behaviours were dang

Welcome to Finance and Fury, the Furious Friday edition. Last Friday, we went through theory versus practical reality of public infrastructure spending – roads and railroads are needed. In this episode - Look back at an economic crash – in relation to infrastructure – I Know there are differences – but illustration of when too much of a good thing can go bad – especially when economic or development policies create a reliance to the economy on economic growth – especially when there is speculation involved What am I talking about? Crash of 1873 - What was it – To start – US coming out of their Civil War(1861-1865) – in an effort to deal with unemployment and economic fallout- infrastructure was proposed – The US has a long history of government job creation program – Job creation efforts were undertaken at the local level by cities or state by state – During the 1857, 1870s and the 1890s economic crisis and depressions going on New York, Boston, Phili – developed municipal programs to aid the poor or unemployed – But the administration and financing of these programs presented major problems for each city or state – Logistics was one but funding was another major one – Led to the proposal for statement government to take over for cities and for the federal government to take over from the states – assumed the responsibility for these work relief programs So a boom in railroad construction commences - 33,000 miles (53,000 km) of new track were laidacross the country between 1868 and 1873 Back then - the railroad industry was the nation's largest employer outside of agriculture due to the work programs – Most of the boom in railroad investment was being driven by government land grants and subsidies to the railroads - involved large amounts of money and but due to the size started becoming a ticking timebomb of financial risk a large infusion of cash from speculators caused spectacular growth in the industry as well as in construction of docks, factories and ancillary facilities that process the goods needed for construction – timber, etc – But how long does it take for infrastructure like railroads to make a return – years – so the capitalwas involved in projects offering no immediate returns Now enters the Coinage act 1873 In 1871 - the German Empire ceased minting silver thaler coins in 1871 – most countries had gold and silver coins – similar to today but back then they were the actual metal, not just imitations But Germany doing this caused a drop in demand and downward pressure on the value of silver Less demand lower prices But this had affects in the United States One effect was in the mining industry – as the US was where much of the supply of silver was mined But also on their monetary system – United States Congress passed the Coinage Act of 1873 - changed the US silver policy Before this - backed its currency with both gold and silver - minted both types of coins This Act moved them to a de factogold standard – resulting in no longer buying silver at a statutory price or allowing for silver to be converted from the public into silver coins Statutory price used to be a monetary tool – set the price of metals like gold and silver based around the money supply – So the immediate effect of depressing silver prices and also changing the coinage law reduced the domestic money supply – this resulted in raising interest rates – hurting those who carried heavy debt loads This perception of instability in United States monetary policy caused investors to shy away from long-term obligations, particularly long-term bonds. The problem was compounded by the railroad boom, which was in its later stages at the time – started kicking off company failures One of the biggest failures - In September 1873, Jay Cooke & Company, a major component of the United States banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Cooke's firm, like many others, had invested heavily in the railroads on both sides – the ownership but also selling bonds (the debt) in the investment to investors Around this time investment banks were anxious for more capital for their enterprises in railroads – easy cash cow and could get government loans – but new monetary policy of contracting the money supply (again, also thereby raising interest rates) made matters worse for those in debt – those who speculated on infrastructure investments – that wouldn't see returns for years – were no left holding the bag with higher interest repayments In addition – put a halt on more infrastructure spending – there were plans by Cooke and other entrepreneurs to build the second transcontinental railroad, called the Northern Pacific Railway. Cooke's firm provided the financing - ground for the line was all ready to go - But just as he was about to swing a US$300 million government loan reports circulated that his firm's credit had become nearly worthless – loan was ceased and in September 1873, the fir

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question comes from Ryan. "I would love to run by a thesis I have and would love to hear your opinion on the matter. I have recently been reading all of Ray Dalios ''Changing World Order' publications on LinkedIn and some of Raoul Pal's information and Jesse Felder's." I remember Jesse releasing his advice to start buying Gold back in late 2018 and since then gold has done really well. Additionally Raoul's thinking is along the line of at some point the government's continual persistence of printing money to attempt to keep the market prices inflated will eventually lead to the millennial's to start investing in alternative assets that could potentially have value and increase in high percentages over the medium term. My thinking has been shaped by these people predominantly in that although the share market may be continually propped up by the central banks- at some point all the fiat currency printing and devaluing of currency (savings) and associated debts (bonds) will have to be dealt with in a debt jubilee type scenario. Especially if the economy (goods and services) can't soak up these debts. From this point of view I am thinking that bitcoin or cryptocurrencies that can't be 'printed' as such out of thin air and gold to a certain extent will continually rise in the future until something occurs along the lines of; - asset prices fall to valuations that make them attractive to purchase again - the government contravenes and makes policies that forbid people to hold gold or cryptocurrencies (this happened in the past with gold) As a millennial I understand that the government has to do their best to keep the ageing baby boomer asset prices (predominantly US share market and Australia property) high so they don't have to fund them in retirement through pension- though I am not sure I am that interested in paying top dollars for these assets in which puts me right out there in the risk curve for not a high enough potential return. Do you have any thoughts on this as I would love to hear other point of views to pick apart my thesis and form a better knowledge before committing too much in any direction? Good points – number to go through –– brings up a number of good points – to cover properly going to take a few episodes – this episode will be some summaries now Been reading Ray dalios posts on ''Changing World Order' – First few chapters of his book is out – rest comes out in September- The premise Reminds me of another book a read a few years ago called 'why nations fail' by a few economists Three major points to cover to break this down The economy and debt jubilees Policies that governments and CBs have implemented that affect asset values – Alternative assets On the debt jubilee - My thinking has been shaped by these people predominantly in that although the share market may be continually propped up by the central banks- at some point all the fiat currency printing and devaluing of currency (savings) and associated debts (bonds) will have to be dealt with in a debt jubilee type scenario. Especially if the economy (goods and services) can't soak up these debts. A debt jubilee is a clearance of debt from public records across a wide sector or a nation. Such a jubilee was proposed as a solution to debt incurred or anticipated during the 2020 in the Government measures around the world Demand side thinking - Calls to reduce debts to help consumers consume more – Student loans is a big one that is brought up – reduce debts and they have more money to consume Debts that may be done away with would be at the nation level – has occurred before – An outright cancelation of sovereign debt shouldn't be ruled out. During the Great Depression, France and Greece had about half of their national debts written off completely. In 1953, the London Debt Agreement between Germany and 20 creditors wrote off 46% of its pre-war debt and 52% of its post-war debt. The country only had to repay debt if it ran a trade surplus, thus encouraging Germany's creditors to invest in its exports, which fuelled its post-war boom. As we pointed out, in 2000, $100 billion worth of debts owed by developing countries were wiped off the books. Again, this is not as far-fetched as it sounds. Because we live in a fiat monetary system, currencies are not backed by anything physical; the reserve currency, the US dollar, was de-coupled from the gold standard in the early 1970s. It's not like a raid on vaults full of gold, which have an inherent, physical store of value. In reality there is nothing preventing central bankers from doing a complete global reset, putting all debt back to zero. going further to get rid of them at the individual level is a different thing together - As a millennial I understand that the government has to do their best to keep the ageing baby boomer asset prices (predominantly US share market and Australia property) high so they don't have to fu

Welcome to Finance and Fury - Where are we at? Market has been going up - Looking at a chart – March in 3 particular years stand out – 2008, 2009 and 2020 – Why? They are each their own respective bottoms of the market after declines – In this episode - March 2008, March 2009 and march 2020 – are we sitting at a similar position as 2008 or 2009? Share market gone up from its March 23rd low – some analysts are seeing similarities with the massive rebound that took place when the markets were emerging from the financial crisis 11 years ago Some market analysists saying that the 'flattening of the curve' in terms of COVID-19 and states slowly re-opening are all helping the market look beyond the current quarter Signs that the market is looking to ahead - 6 months, 12 months out – Or is it short term profit seeking behaviours? By the market in speculation terms is myopic – so are traders buying long or seeing this as a short term profit maximisation strategy? There has never been a significant portion of the largest economies in the world shuttered as well as other economies around the world shuttered – or what that would look like coming out of it – the domino effect is impossible to predict – So the market gaining in price now – i.e. looking ahead Those analysis have also prompted many forecasts as to what the shape of the economic recovery will look like A lot are forecasting a likely V-shape recovery in equities occurring - with likely a U-shaped recovery following with the economy - are closely watching for broader participation as a positive indicator for the markets. Look at the historical Patterns – First march pattern - Going back to December 2007 – Market at 6,600 – then by march had hit 5,127 = a 23% loss By end of may – market had recovered back to 5,931 – rebound of 16% but still 10% lower from peak Pattern – loss of 1,527, then a gain of 804 points – this rebound in points terms is around 53% Then by July back down to 4,900 – about a 17% drop – hovered around there until September Then dropped to 3,800 in October – then rebounded to 4,350 in November – then by December had dropped back to 3,222 – new low Pattern – Loss of 1,100 from July to October, recovery of 540 in November, then a loss of 1,014 – saw a rebound of 50% then a decline by double the rebound Second March Pattern – Going back to December 2008 – new low of 3,322 Saw the stock market gaining in confidence has shot higher for a second straight session as investors bet that President-elect Barack Obama's plans to increase infrastructure spending will lift the economy back to health - Markets went back up to 3,800 by January 2009 – But then lost traction and went down to 3,145 by march 2009 – rallied after this until October 2009 - Patterns – markets went down by 1,014 – then went back up by 478 point - initially saw a 47% rebound – from the low in Dec 08 to Jan – then markets dropped again to a new low – drop of 655 points – Then from low point – markets went up until October 2009 when they stalled out again - went up and down and by mid 2011 was around the same level – about 5,000 – but by end of 2011 was down to 4,000 Where we are at now – Markets went from 7,130 to 4,546 – large point drop within a month and a half – 36.24% drop Then by May they were 5,500, Now they are sitting at about 6,000 – 31.9% gain since the bottom Based around the larger retracement patterns in the 62% range, we aren't quite there yet – Market would need to be around 6,130 to hit this point from the low Drop of 2,584 points, now had a rebound of 1,454 – equal to about 56% - another 130 points and we will see what happens Had no strong pull backs along the upwards movements – there has been a bullish breakthrough Markets aren't easily predictable – but What this should at least illustrate – markets move up and down in times of uncertainty – when and by how much who knows – don't have a crystal ball - People say that these are unprecedented times - Differences between now and 2008 – Time – event of GFC versus this – what till take longer to recover from? Works against the V shaped pattern expectations of what the markets are currently on The nature of the collapse – at the root both were governmental policies in lending and guarantees versus lock downs Difference is the sectors impacted – the housing market and banks – versus employment at a larger level and the flow on effects of this Staved off at this stage – Gov stimulus policies – super withdrawals - $10.5bn – spikes in demand Long term – may not last Risk free rates – talked about this in the CAPM episode last week – but the cash rates and borrowing rates are low – can borrow and invest at low opportunity cost – Makes bubble situations or rebounds in markets more prevalent – but speculative based – purely for profit maximisation in trading – not in the actual performance of the companies that make up the market Amount of money being pumped into markets – QE programs and Central banking policies - Back in

Welcome to Finance and Fury. Can public infrastructure spending help to boost a depressed economy? In this episode we look at the theory of infrastructure spending on public goods, such as roads and bridges, versus the practical reality of this type of fiscal policy. At the moment – there are lots of Proposals for Infrastructure to boost economy – USA, Aus, EU – beyond other stimulus measures – this is one that billions of dollars can be pledged to First- what infrastructure governments spend funds on – Public infrastructure – for instance - spending on roads, bridges, train lines, sewerage systems - other such projects which are considered a public good – i.e. usable for all – This type of spending is one of the most advertised tools of anti-recessionary fiscal policy Why? When the economy struggles, politicians and public economists call for greater infrastructure spending as a form of stimulus This can be politically expedient as well - especially when the spending takes place in the politician's state. However – how well does it provide stimulus to the economy? The theory of infrastructure stimulus – Government stimulus spending - infrastructure or other Gov consumption on goods and services – part of the Keynesian assumption where an underproductive economy can be spurred back to full output by using new public expenditures – we have gone through this theory in previous FF episodes – but the aim is to boost aggregate demand – GDP In relation to infrastructure – the theory is that involuntarily unemployed persons can be given public infrastructure jobs and receive an income This then feeds back into the economy with consumption spending – meant to promote more GDP growth John Maynard Keynes theorised that public infrastructure deficit spending could produce a multiplier effect on economic growth Especially when real interest rates are low – can borrow – create jobs while the project is under way and those incomes produce more GDP in economic spending Australian GDP composition - household consumption: 56.9%, investment: 24.1%, net exports 0.5%, government consumption: 18.5% Of gov consumption – around 4.4% is infrastructure spending – pretty high compared to a lot of other nations – China 8.3%, India 5.6%, Saudi Arabia – 5.1%, South Africa – 4.7%, 5th on the list - Australia – 4.4% Basic assumptions on this theory - Keynesian stimulus spending assumes essentially zero opportunity costs if the deficit spending occurs during a period of higher-than-normal unemployment – Those who are unemployed could not be employed anywhere else – for higher incomes – What this looks like in practice – Some assumptions I have seen – Economic policy institute - The "bang for the buck" is estimated by the one-year dollar change in gross domestic product (GDP) for a given dollar increase in spending. Multiplier indicates how much total output (GDP) changes in response to a $1 increase in deficit resulting from the fiscal policy change Outcome from increased infrastructure spending - $1.57 – could find a fair amount of papers theorising the benefits- One problem with theory of infrastructure spending - it ignores so-called "Cantillon effects" the relative change in different prices as the result of new money entering the economy new spending increases prices and demand in some areas faster and more deeply than in other areas - it has the side effect of misdirecting production away from areas where private citizens might voluntarily choose to dedicate their money – creating a misallocation of pricing Example – Massive inflows of funds into infrastructure spending pushes up the cost of infrastructure up – anyone who has had a damaged driveway gutter and requires the local council to replace this knows what I am talking about – minimum costs of $1,500 in most cases, just for a wheelbarrow of concrete Essentially, the economy trades off a short-term reduction in unemployment for a long-term misallocation resources and employment potentials that produces higher unemployment long term – as once the project is over those jobs are gone Also – employment only benefits one sector of the economy – those in public works/construction – at this stage of where the economy is at – this is not where the unemployment issues have materialised Another problem – it ignores opportunity costs – these may be very large opportunity costs and implementation costs associated with the high levels that are required for infrastructure spending I talked about the issue with not having any feedback loops in deacision making - governments do not produce anything with a calculable market value – or do they receive any feedback – it is not like their revenues, or the taxes we pay can be withheld by us if we don't think they are doing a good job or agree with what they are spending it on – Their spending decisions are independent of consumer valuations and therefore blind to any real economic feedback There – no feedback on if infrastructure spending is the be

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question is from Charl, regarding his home loan. "My bank is currently offering a 2.29% interest rate on a 3-year fixed loan. I am currently on a 2.99% Variable rate with them and am considering taking them up on this offer. I have funds in an offset account and don't want to lose out of the flexibility of a variable loan. Do you think I should fix the majority of my loan and keep it variable on a small component, or keep it variable for now to see where the interest rates go?" To fix or not – Currently at record low interest rates – cash rate of 0.25% But can go lower – RBA kept rates the same But expectations that rates will be low for some time RBA ASX rate indicator Future of interest rates – Will rates go up? The period is 3 years fixed – so in 3 years will variable rates will be higher? Don't see it – shape of the economy and debt levels have created a bit of a liquidity trap What if rates were to increase – Household debt to GDP – quite high Australia's 6 million home loans, worth a collective $2.1 trillion Rate move of 0.25% means $5.25bn less to be spent in economy – given the demand side – keep rates low What would it take for interest rates to go up? The economy to recover and for GDP to be back on track Or inflation kicks in with a vengeance – has happened – US and Aus and lots of Western nations inflation emerged as an economic and political challenge in the US in the 1970s. The monetary policiesof the Federal Reserve board, led by Volcker, were widely credited with curbing the rate of inflation and expectations that inflation would continue. US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983. How did they do this - The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime raterose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%. Australia followed suit as well with our – recession we had to have – was our last one in 1991 or so – The recession happened because of the unwinding of the excesses of the 1980s, the international recession of the early 1990s and the high interest rates - High interest rates were employed to slow the asset price boom of 1988–89 - Treasurer Keating, the Reserve Bank and Treasury itself generally agreed on the need for high interest rates in 1989 that lasted for 2 or so years – Our economy started to sink - The Government promised economic recovery for 1991 and launched a series of asset sales to increase revenue. GDP sank, unemployment rose, revenue collapsed and welfare payments surged. The recession started in the September quarter of 1990 and lasted until the September quarter of 1991. During the recession, GDP fell by 1.7 per cent, employment by 3.4 per cent and the unemployment rate rose to 10.8 per cent. but back then – Household debt to GDP was 40% - today it is 120% - 3 times larger compared to the ratio of the economy Imagine today – the destruction of increased rates to a few percentage points – Economy already fragile – would create mass bankruptcies and a depression Not out of the question though – could be done but it would be done knowing that it would create a bad situation Will they go down? They might – good chance that they will soon – depending on what happens next month with RBA – But cash rates are not bank interest rates – would need to be passed on Does this mean that you will be worse off on a 2.29% fixed rate? Technically no – rate decrease of variable by 0.25% is still higher than 2.29% Looking at variable rates at the moment – sitting at about 3% for most big banks – The cash rate is 0.25% - if it goes to 0% and assuming the full thing is passed on – rates go down to 2.75% But looking at the cheaper rates - Does this low fixed rate mean that negative rates may be on the way? And What happens if they go into the negative territory? Would take some time to materialise – Could be offering low rates and fixing people in to secure loans at the bank level Also – banks own finding costs have been reduced from the RBA - so may be part of this One factor – banks don't like to lose money – Fixed rate of 2.29% seems to indicate they know something about the future of interest rates – Looking at longer term fixed rates – 5 years at 2.69% - don't expect a rate increase for 5 years Also – variable rates – average is slightly below 3% - down to about 2.5% as some of the cheapest - Issues with Fixed rates – If rates go down below the fixed rate – Breaking costs – if you have to sell the house – or discharge the loan – but if you are staying in there long term – the risk is lower The strategy – not personal advice – what I would look at doing Splitting – Keeping some variable – Fix at the 2.29% a decent size of the loan - Strategy is over a 3 year period – how much can be paid back in

Welcome to Finance and Fury. How useful is investment theory when it comes to practically investing and calculating an expected return? Lot of theory when it comes to investing – efficient frontiers, EMH – working out expected returns In this episode – we will look at One aspect – CAPM – and look at Beta – see how well this can be used when selecting investing - What Is the Capital Asset Pricing Model? The Capital Asset Pricing Model (CAPM) describes the relationship between the risk (volatility) of the market and expected returnfor an investment – used in the share market mainly – Foundation for theory that is used throughout finance for pricing securitiesthat have risk – volatility – The formula - calculating the expected return is as follows: Expected return = RF + BETA X Risk Premium Risk free rate of return - Investors expect to be compensated for risk and the time value of money. The risk-free rate in the CAPM formula accounts for the time value of money. 10-year bond is normally the risk-free rate The other components of the CAPM formula look at the incentives for an investor taking on additional risk This is due to investments beta is then multiplied by the market risk premium Risk Premium = Expected return of market – RF the return expected from the market above the risk-free rate gives an investor the required return or discount rate they can use to find the value of an asset. But the big one is the Beta - The beta of a potential investment is a measure of how much risk the investment has when compared to the market – The aim of Beta is a measure of the volatility of a security or portfolio compared to the market as a whole and is meant to show if the investment has a chance to provide above market returns The value of Beta effectively describes the activity of a security's returns as it responds to swings in the market. If a share is riskier than the market, it will have a beta greater than one. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio – can be positive or negative Beta Value Equal to 1.0 - indicates that its price activity is strongly correlated with the market – could either be the index or a fund/investment that acts exactly like it – active fund that is a benchmark hugger - Beta Value Less Than One - theoretically less volatile than the market – seen as less risky than high betas Beta Value Greater Than One - indicates that the investments price is theoretically more volatile than the market – for example – if a shares beta is 1.5 - assumed to be 50% more volatile than the market - indicates that adding this investment to a portfolio will increase the risk, but may also increase its expected return Can also have Negative Beta Value - Some stocks have negative betas. A beta of -1.0 means that the stock is inversely correlated to the market benchmark - inverse ETFsare designed to have negative betas – not great to have two assets with negative betas – Examples – RF 2%, market return is 8% - CAPM relies on assumptions – come back to this Beta of 1 = ER= 2%+1x(8%-2%) = 8% Beta Greater than 1 – 3 = ER= 2%+3x(8%-2%) = 20% Beta less than 1 – 0.5 = ER= 2%+0.5x(8%-2%) = 5% Beta of -1 = -4% p.a. ER RF asset is low at the moment – long term – say it was 5% - how does this change Beta of 1 = ER= 5%+1x(8%-5%) = 8% Beta Greater than 1 – 3 = ER= 5%+3x(8%-5%) = 14% Beta less than 1 – 0.5 = ER= 5%+0.5x(8%-5%) = 6.5% Beta of -1 = 2% p.a. ER As the RF asset increases – the beta starts to become less important – But Theory that over the long term – additional beta means more growth - Is it true? Beta in Theory vs. Beta in Practice In theory - beta assumes that a shares returns are normally distributed from a statistical perspective – average returns over time – but financial markets are prone to large surprises – like what has just occurred – the returns have outliers – not normally distributed – so the ER relying on Beta doesn't have a short term (or LT) ability to predict the expected return How well does this stack up in practice - Look at BETA of a few managed funds – and returns Four funds to look at – compare Betas, the calculated ER, the actual 10y return Beta 2.02 0.95 0.86 1 ER 14.120% 7.700% 7.160% 8.000% AR-10y 6.69% 6.84% 7.75% 5.66% Difference -7.4300% -0.8600% 0.5900% -2.3400% Large Cap – benchmark unaware Large cap – geared – Beta of 2.02 Large Cap – active growth – 0.95 Index – 1 Compare long term returns – the differences are not what is expected based on theory – but make sense - How – betas less than 1 have less of a systematic risk – this is the Beta value of 1 in a way - the risk of the entire market declining – when the whole index collapses -this is an example of a systematic-risk event - the Systematic risk of the index by itself is un-diversifiable risk – If it is your only investment – it means your funds will lose value – but a beta of less than 1 means it is less volatile than the market – but it may be get a better long term r

Welcome to Finance and Fury, the Furious Friday edition. Today we're look at if economic data really means anything. I was thinking – and do any of these numbers really matters to you? Or even to me? Think about this – talk about a lot of the metrics – GDP, Inflation, employment statistics As an economy – would you prefer to have high GDP – or having your disposable income increase? Employment statistics – or having the ability to find a good well-paying job Inflation measurement – or have the ability to save and be rewarded in interest income? Thought about this for a while – most of these numbers mean nothing for the average person – But unfortunately they have an indirect effect on our lives - What dictates economic policy – fiscal or monetary – GDP or employment stats aren't what matters to the average person – but the setting of interest rates and having a targeted inflation policy does have a real world effect on people First - Issue with these stats and measurements – done by the ABS Employment – You have employed, unemployed and not in the workforce - what makes someone employed? Working for 1 hour a week – Unemployed – if you don't have a job, but you actively looked for one in the past 4 weeks, and can start work in less than a week – Not in the labour force – don't have a job, couldn't have started in the last week, not looking for work or starting a job in the next 4 weeks – if I ceased working now – ABS website - The Labour Force Survey is based on a multi-stage area sample of private dwellings (currently approximately 26,000 houses, flats, etc.), a list sample of non-private dwellings (hotels, motels, etc.), and covers approximately 0.32% of the civilian population of Australia aged 15 years and over. Sampling error occurs because a sample, rather than the entire population, is surveyed. Inflation – The Consumer Price Index (CPI) measures quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by the CPI population group What is in the basket 11 groups - Food and non-alcoholic beverages, Alcohol and tobacco, Clothing and footwear, Housing, Furnishings, household equipment and services, Health, Transport, Communication, Recreation and culture, Education, Insurance and financial services. These price movements collected from - The Household Expenditure Survey (HES) is used to update the weights in the years that it is available - The HES provides the most comprehensive data on household expenditure. The HES is a sample of just under 8,000 metropolitan households. Data are collected using a diary of personal expenditures in which residents aged 15 years and older record their expenditure over a two-week period. The cost of housing is measured as the price of a new home (excluding land). Mortgage interest payments are excluded – not a true reflection of cost of living GDP - Any economics textbook will admit that GDP is flawed when it comes to measuring production in an economy – (doesn't include black market, and is very hard to measure accurately) – The majority of the estimates in the quarterly national accounts are based on the results of sample surveys - Think about all of these stats - So many people to keep track of – relies on data collection – Relies on surveys and naturally has sampling errors – Inflation is similar – survey of respondents in their purchases in the basket of goods – non-response and sampling 8,000 households out of the 8.5m households in Australia – 0.094% This is how it is done though - and state there is a 95% confidence interval – the issue is there is not a great way of measuring these statistics – too many people – too much variation – but monetary and fiscal policy makers need this data to make their decisions – Which is the problem – the need to try and control the economy – using Fiscal and monetary policies- but there is no great feedback loop on data – Feedback loop in important in decision making – example – touch a hot pan – you get burnt straight away – and you know it as your pain receptors fire instantaneously – you learn to not touch the pan again when it is hot Smaller business- make a decision to change products or services, charge different price – get an almost instant feedback – did it work or not? Make take a month or two to really see – but then a small company can pivot and has a wide range of actions that it can take – Government or CB level – change one policy – no idea if it has worked or not – as this is at the macro level where you have 1m other inputs – it is just to have assumed to have worked – and if it didn't – just do more of the same thing – there is not really any pivoting – think about a ship changing course – small boat relatively quick – behemoth cruise ship – not as easy to do a 180 if you about to hit a dock Almost like touching a hot pan and not having your pain receptors firing until months or years later – might not have any skin left by that point Regardless – this

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question from Jacob. "Hi Louis – I have a question about the forecasts of our recovery. I read that the RBA is expecting the economy to have a v shaped recovery and it seems that the share market is also going back up. My question is do you think the recovery will be v shaped? Would be great to get your thoughts on this." Thanks Jacob – that is a great question – today run through what these recovery patterns are, look at the metrics behind them and see if these stack up against what a v shaped recovery pattern looks like Before we get into the shapes – I have little faith in the RBA models – purely based on their track records and the modelling used What Is V-Shaped Recovery? Description of a pattern of recovery – Lots of different letters to describe the pattern of recovery – V, L, U, W - the shapes take their names from the approximate shape economic data make in graphs during recessions – The type of recovery pattern is represented by the general shape of the chart of economic metrics that are used to measure the health of the economy - employment rates, GDP, productivity, etc. V-shaped recovery resembles a "V" shape in charting involves a sharp decline in economic metrics followed by a sharp rise back to its previous peak So the question comes back to – will the economy quickly and strongly recover to the previous peak? For this to occur - a significant shift in economic activity would need to materialise – either caused by increased consumer demand and spending, business employment going back to previous highs – and it would need to happen quickly First – look at one V-shaped recovery - The recession of 1953 in the United States is a clear example of one In the 1950s - US economy was booming – due to booming economy - FED anticipated inflation, and thus raised interest rates – this had the effect of tipping the economy into a recession – a lot of the growth was backed off borrowings to the business sector, being the new economic powerhouse for manufacturing and production after EU nations left in the dust from WW2 – so with higher costs - Growth began to slow in the third quarter of 1953 - but by the fourth quarter of 1954 GDP growth was back at a pace well above the trend - therefore the chart for this recession and recovery would represent a V shape – How does this compare to what is materialising today? Employment didn't drop massively, consumption didn't drop massively, it was mostly investment that stalled out – and the borrowings by businesses for investments were into productive enterprises – so real growth materialised from this – different to borrowing for buybacks Plus – the interest rate rise is nothing like an economic shutdown There are a bunch of reasons to expect this recovery to be longer than the market's V-shaped expectations – some in the media are pointing towards a easy and quick recover once things are opened back up – so lets look at some of the factors Current economic data – I have a problem with a lot of the data – do another episode on the flaws in reporting – but best we have Employment – there has been a material disruption to the jobs landscape. April unemployment numbers revealed a jump in unemployment from 5.2% to 6.2% - was less than forecasted – but doesn't show the full story – all employees who received the government's JobKeeper wage subsidy were counted as employed - even if they didn't work any hours To be considered employed – you only need to be working 1 hour a week – so those in casual roles or other employment positions like cafes, etc who got cut in hours were still employed as well Seek data shows the reduction in ads being listed - this means there are fewer business looking to hire This has been a bit of a downwards trend – from 2014 was growing YOY on average by 10% - started to drop in 2019 and be a negative YOY change by 10% - but fell off a cliff being 60% down with the shutdowns The participation rate fell to its lowest level in sixteen years, from 66% to 63.5% - If the participation rate had remained unchanged, the unemployment rate would be over 10% - remember that if you aren't looking for a job – you aren't unemployed – look at the sectors of employment - the retail sector is the second largest employer in Aus – before the shutdowns – massive number of large retail stores were closing a significant number of stores – 10 major brands – this was before the shut downs – now have Flight Centre, lots of Target stores and the list goes on – so even if lockdowns didn't come into effect – these stores were already in trouble - the construction industry is the third largest employment sector in Australia - a third of its employees are in residential construction Based around a few surveys - residential builders are experiencing cancellations of up to a third of new home building contracts – renovations/home improvement went up slightly – but this was a short term spike that may be f

Welcome to Finance and Fury. One major issue for shares in Australia and around the world – with the lock downs and companies bottom lines being affected - Dividend cuts on the rise In this episode we will look at the ASX and the dividend cuts. We will also cover which sectors are being affected and the overall drops compared to previous crashes, along with if there is an opportunity out these in this. What has happened? If you have been living under a rock - The response from governments to manage Covid led to significant changes in daily life – also has had significant impacts on economic growth globally and in Australia 2020 will likely be one of the worst years on record for global developed economies as the impacts of forced shutdowns halts economic output - created unprecedented levels of economic uncertainty Forecasts from the RBA show the Australian GDP to contract by 6% in 2020, and June 2020 unemployment to be 10% - numbers might not be as bad as initially thought – see what happens next month – but what has happened is that listed companies are taking action at the board level on their dividend policies Dividends – These are profits paid out – if you are a shareholder – you are an owner in the business – therefore the company makes a profit – you should be entitled to some of this – DPR at the board level decides how much Dividends have had a massive impact on returns for the ASX over any other market – Over the past decade, the total return for the S&P/ASX 200 was 7.1% pa – of which 6.1% (about 87% of that total return) was from dividends including FCs – 0.9% price, 1.6% FC and 4.5% dividend over past 10 years - Dividend payments in Australia totalled $80 billion last financial year Our market has been fairly reliant on dividends as part of a total return – so the cuts to these in the short term makes for a poor total return unless price gains pick up the slack this year – What does that mean for company earnings and dividends? The change in economic conditions has had a severe impact on the outlook for earnings over the next year Many companies have abandoned earnings guidance due to the extreme uncertainty around when some level of normal will return to business conditions and confidence At the same time - Capital raisings have been frequent (and in relatively large size, as they were during the GFC) to keep companies capital in a safe position - Prices of shares have reacted strongly to this news - yield stocks (like the banks) have been some of the worst performers in the ASX 200 – if Divs are cut these goes your returns Since the middle of February, over 30% of companies in the ASX200 have deferred, cancelled, suspended, or revised dividends 13% deferred payment, 4% cancelled, 4% suspended, 4% no dividend, 1% revised The cuts to dividends have been a significant headwind for yield-focussed portfolios DPS and EPS growth were already low before lock downs – EPS is the profits – DPS is how much of that is paid out – the market DPR was high – banks sitting at about 80% - so if profits drop by 20% - means no retained earnings – so drop DPS- The ASX200 did have a high concentration in its income yield - Over 50% of dividends are paid by just eight companies - two-thirds of dividends paid by 18 companies – at the index level leaves market susceptible to the larger companies (banks) cutting dividends – like they currently are What sectors will be the most affected in the ASX200 and their weighting on dividends Low risk Supermarkets, telcos, pharma, tech, gold and iron ore 64 shares making up 30% of dividend weights Possible cuts in 2020 and 2021 – 5% and 0% Medium risk Financials, building/construction, discretionary health care 107 shares making up 30% of dividend weight Possible div cuts in 2020 and 2021 – 33% and 20% High risk Travel, entertainment, casinos, shopping centres, energy (oil) 27 shares making up 10% of div weights Possible div cuts in 2020 and 2021 – 100% and 33% The outlier – banks 7 shares making up 30% of weight – Possible div cuts in 2020 and 2021 - 60% and 50% In total – average of 40% to ASX200 in 2020 – then 24% in 2021 The big 4 - Australian banks have historically been key features of any yield portfolio due to steady franked dividends Unsurprisingly -they have been amongst the worst hit through the COVID-19 market downturn, as economic activity slows and net interest margins shrink (as a result of lower interest rates); from the market high on Feb 21st to the bottom on Mar 23rd Australian banks fell an astonishing 44%, underperforming the ASX200 index by almost 10% Also – whilst the market has rallied off the bottom through April and into May, banks are down 37% from the February market high – no real really in the banks seen Three of the big four banks acted quickly announce their dividend decisions; ANZ suspended its interim dividend, NAB cut its interim dividend by 64% (to 30c) and announced a $3b capital raising, and WBC deferred its interim dividend decision without a

Welcome to Finance and Fury, The Furious Friday edition. I love history – valuable lessons. When looking at us To those in the past - Culturally we are different, but biologically we are not. If any one of us was put back in time to grow up in past civilisations, we would be no different to the local people in that time period – the environment we grow up in has a lot to do with our values and outlooks One thing is fairly consistent with human nature – path of least resistance – as an aggregate – driver for technology and innovation – Making things easier for our lives - Cars – less effort than walking, less mess than horses – getting food – go and hunt or grow it, or go to supermarket or fast food - Convenience of safety in numbers and ease of living – towns and cities developed – more people to defend and also produce and specialise – trade – and with this – the requirement of having others be in charge of decisions for the whole group – But what happens when the path of lease resistance starts to occur at the societal level in decision making? Individual choice gets outsourced – just like what occurs when outsourcing in building a house or getting their food from a supermarket – the rules that govern life and the economy is placed in the hands of others In this episode - We will be looking back in history - looking at one of the greatest civilisations in history. And how they declined – economically anyway – many many things contributed to their decline – but there is a parable when it comes to their economic decline – what happens when the population becomes reliant on the government that has complete control over the currency? misallocation of resources and the devaluation of their own currency Rome rise – and economic fall from the people losing power - Rome is a good example: It was a tiny kingdom that was overthrown in 509BC – for hundreds of years after getting rid of a king – the people were adamantly opposed to any form of centralised rule – But the romans were smart and adaptable as a culture – they didn't invent too much in the way of technology for themselves – but were masters at adapting other technology and integrating it as their own With this they started to grow – through war and conquest – the next few hundred years saw Rome and the people start to grow wealthy – wealth through conquest – looking through cultural eyes of the times – this is how it was done – the state grew through conquest Economic Side – in the early republic Citizens were only taxed in times of war – Citizens were land owners and had to have been given citizenship 10 years in the Roman Army was the criteria – true that the wealthy ended up getting citizenship – as they could afford the weapons, armour, horses to arm themselves to fight in wars - Misconception – Most of the early Roman army were from the middle to upper classes They had low tax collection – and only on the land owners – Each province had to pay a certain amount (not ind.) Tax collected (who was elected) – Pay Rome upfront then go collect his money back from people – very decentralised – same in rule Stay out of the way economic policy – If you weren't a citizen – you didn't have to pay any taxes – you had no say in electing senators – but the way they saw it was if you didn't contribute to rome – through military service or paying taxation – you don't get to vote Rome went from a back water swamp to a wealthy country – became the age of Affluence! But at the same time – there started to become an economic disruption – the shift from a republic to an empire and Slavery What turned rome from the republic to a dictatorship - 27 BC – Augustus Caesar converted the Republic into an Empire Prior to this - By 60BC Julius Caesar (more or less godfather to Augustus) was elected consul however used this position to gain further power To build favour, he redistributed a lot of land to the poor and the soldiers of his wars Major contributor to their economic decline - Government corruption and political instability was growing over this time If Rome's sheer size made it difficult to govern under the new Empire standards – Centralised authority compared to localised under the republic - ineffective and inconsistent leadership only served to magnify the problem Being the Roman emperor became a dangerous job – through the second and third centuries it nearly became a death sentence. The amount of power put into the political class was what started causing chaos – but also needed the public to like you – why bread and games strategies were so important Civil war thrust the empire into chaos, and more than 20 men took the throne in the span of only 75 years, usually after the murder of their predecessor. The Praetorian Guard—the emperor's personal bodyguards—assassinated and installed new sovereigns at will, and once even auctioned the spot off to the highest bidder. The political rot also extended to the Roman Senate, which failed to temper the excesses of the emperors

Welcome to Finance and Fury, the Say What Wednesday edition. This week's question comes from Francesca. "I have really liked your podcast on the pandemic bonds, I had read about these bonds maybe a month ago in The Economist. My question after listening to the podcast on pandemic bonds was, who controls the world bank? Well I know...the member countries, but how could they screw it up so well? Thanks for keeping us update on it. And keep up with your great work Thanks!" In this episode – look at the world bank, what they do, who controls it, who funds it and at the core – why does it have problems What is the world bank – The World Bank Group is a family of five international organizations that make leveraged loans to developing countries. It is the largest and most well-known development bank in the world and is an observer at the United Nations Development Group. The bank is headquartered in Washington, D.C. in the United States – what makes up the group – the International Bank for Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees; the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector; the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees; the International Centre for Settlement of Investment Disputes (ICSID), established in 1965, which works with governments to reduce investment risk; the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, primarily to the private sector. Not a bank in the ordinary sense, the World Bank Group is a unique partnership, made up by 189 member countries – has two goals: ending extreme poverty by 2030 and promoting shared prosperity by lifting the bottom 40% in every country. The IMF and the World Bank were both created at an international conference convened in Bretton Woods - 1944. Who controls the World bank - The 189 member countries are technically shareholders – but each country is represented by a Board of Governors – they are the policymakers at the World Bank. Generally, the governors are member countries' ministers of finance or ministers of development. They meet once a year at the Annual Meetings of the Boards of Governors of the World Bank Group and the IMF – sets the agenda for the year – But The governors delegate specific duties to 25 Executive Directors – they make up the board of directors at the world bank - who work on-site at the Bank - five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors - normally meet at least twice a week to oversee the Bank's business, including approval of loans and guarantees, new policies, the administrative budget, country assistance strategies and borrowing and financial decisions. office is usually held by the country's minister of finance, governor of its central bank, or a senior official of similar rank The United States and the World Banks relationship - The US Secretary of the Treasury sits on the World Bank's Board of Governors, the World Bank's highest governing body – the US gets to choose who is president as well- The World Bank is treated as an "exempt issuer" under the US securities laws since 1949 in recognition of its status as an international organization in which the U.S. is the largest shareholder (with about 17%). The United States' membership in the World Bank was authorized by a federal statute known as the Bretton Woods Agreements Act (22 U.S.C. 286 et seq.). The other countries on the list – Japan (8%), China (5%), Germany (4.3%) – UK and France tied for 5th (4%) – make up about 42% of voting rights But – some of the countries have higher voting rights with other of the agencies – USA has around 23% voting rights its private sector arm, the International Finance Corporation (IFC) Statement: The World Bank looks forward to continuing to provide support to US investors so that they may consider supranationals when looking for safe investments – i.e. an organization is an international group in which the power and influence of member states transcend national boundaries or interests to share in decision making Who funds the world bank has - three main income streams - The first derives from their lending operations, charging mainly the borrowing countries; and the second from their income on investments in financial markets. Additionally, the International Development Association (IDA) receives contributions from members Have replenishments every three years – Aus donated $345m (USD) - $526m Aus – Denominations are in SDRs though in a lot of cases – in total raised $23.5bn USD But they make most of their money through their