This is Motley Fool Money. But you know, one of the things I just thought is that, so Ola, which is the Uber competitor, is also a big part. So everybody has both Ola and Uber. But there's a lot of rising discontent.
I asked every driver that we use Uber a lot. And I asked each one of them, you know, how's it working out? And they said, you know, the initial days were really great. The fares were really high.
And, you know, we all went out and took loans, car loans, and bought these cars. And, you know, initially it was working out awesomely well. And now we're just struggling to make our payments and things like that. And as soon as we make our payments, we are off Uber.
So that's my take on. That kind of thing is like what's happening in Australia, right? Yeah. And then you squeeze them.
Fascinating. The key economy is a topic we should probably discuss later, but we're not going to do that now, and I apologize for going off script. Today, instead, we are going to talk about a bit of macro, a bit of what's going on in the broader economic world, including interest rates and unemployment. We will talk about Afterpay, as I mentioned.
It's in the news again this week. It is the catnip for headline writers around the country. Afterpay, again, in the news. And there is some validity to wipers in the news.
We'll talk about that. We'll talk about new digital banks that are on the march. So, you know what, next for some of the big guys. And, because we love to, we're going to dip into the Motley Fool mailbag.
We had a heap of questions over the last few weeks, which we love desperately. So, of course, thank you for taking the time, sending in your questions, comments and feedback. We love them. We want more, as always.
I'll put in a quick plug now. If you do want to get in contact, info at fool.com.au. That's I-N-F-O, info, at fool.com.au. Or hit us up on Twitter, which is probably the best place, because we can interact with you, your fellow members, and see what's going on, at TheMotleyFoolAU.
Surprise, surprise. I'm at TMF.P. And Doc is at AnirbanMahanti. You can get any or all of us, and we'll have a chat on Twitter.
Of course. Now, mate, let's go to the big macro. It's really, really good. In the face of all the doom and gloom of the past month, the stock market's been a different funk.
It hasn't been a great time to be an investor. Lots of bad news on the horizon. This one was pretty good. Unemployment in Australia now down to 5.0%.
Unemployment in New South Wales, the lowest since at least 1978. So I do my math quickly. That's 41 odd years. That's pretty good.
Well, I mean, it's really great. But if you want to be a pessimist, you can say, hey, this is the best it gets, and how it's going to get worse. Oh, jeez. Come on.
You're miserable if the unemployment is high. You're miserable if it's low. Can we not have positivity somewhere around here? Yeah.
I think this is a surprising thing, right? I mean, you know, let's talk that retail numbers are not looking good. Let's talk that the foot traffic in malls are down. So in the face of that, there have been some downgrades from companies.
In the face of all that, this is very positive news, right? I mean, there's maybe a contradiction in themes. The stock market's not happy. Some companies are not making their ends meet.
But employment numbers are rising. I'll point out one thing, though. The full-time employment was down, and part-time employment was up. So in aggregate, it was up.
But let me just keep that in mind. December generally has a lot of casual workers coming in to provide help with a set of chills at shops. So there's extra activity that happens at that time. But nonetheless, again, as I've always said, there are headwinds, but this is a positive among the headwinds.
It's a tick in my box. Damned with faint praise, I think we call this one. I'm going to be unabashedly optimistic, mate, because I like to be, and I think it's the right thing. I'm pretty happy to see the employment numbers going the right way.
The bigger question for me is really the challenge of wages. You know, in a normal world, in the past, in economic orthodoxy, what's supposed to happen is unemployment decreases. As employment goes up, wages are supposed to go up as well, because there are fewer workers. Companies have to pay more to get people to come and work for them.
That's kind of been supposed to happen for the last couple of years. To some of our wonky, I've heard the term NIRU before, the non-accelerating inflation rate of unemployment, one of my favourites, and one of the pollies was called on a current fair on one of those shows once. The idea is basically, at some point, there's supposed to be a level of employment, or unemployment, before which there's no inflation, after which wage inflation starts to creep in. We haven't seen that yet.
I think that's the biggest A question, and B, I think, to some extent, I think it's holding back the economy more than most. If we've seen some wage inflation over the last couple of years, we've probably seen increase in spending, and a bit more solidity in the basic physical economy. It really hasn't come through, because most people don't have any more money in their pockets to spend, despite the fact that unemployment's fallen. If the employer's coming from casual work and part-time employment, maybe that's part of the reason why it's not going up.
Maybe there are plenty of people who want casual work, who are looking for casual work and businesses are able to get them when they want, and then again release them when they don't want. Part-time work is permanent, so to some degree that's partly true. One of my favourite economists who I do appear on Your Money with, the Old Sky Business, Stephen Roberts from Alexander Funds Management, he's also mentioned that while individual per hour wages have increased, the actual household income has increased by about 6% year on year, simply because there are more people in the workforce. So while you're not getting more money, I'm not getting more money, if more members of our family are working, the household income actually goes up, even if the person per hour wage doesn't increase.
Again, that's okay, but that's giving some context to a bit of positivity in the economy, and hopefully, for all that's sakes, it's enough to keep the economy rolling forward. So the inflation is a minimal and the household income actually goes up 6%. That's actually a net positive, right? Quite a bit of net positive.
You know what? I'm going to rant a little bit. We haven't had a house for a while, and we'll have one in this podcast if I remember, and we don't run out of time. To your point about that, I think that's one of the big, one of my big bugbears is that sense of, people would rather, if you ask most people, sorry, no one would admit it, right?
But psychologically, most of us would rather a 5% pay increase in a 6% inflation environment when we're actually going backwards. We'd rather get a 2% wage increase or 1% inflation rate. We like bigger numbers, it feels like we're getting more money, even though our money is buying less, in the first case, our purchasing power is decreasing. In the second case, even though we're getting less in terms of extra dollars, our purchasing power is increasing.
Most of us would rather a larger increase, even in a higher inflation environment. I'm pretty sure economic confidence would be higher if we had higher inflation and higher weight, but less high than the current situation, because we're all used to look at that one number in the bank account saying it's going up or not, rather than genuinely do I have more money to spend. I think that's the big one. We need fake inflation.
That's good to all the top of it. Fake inflation, I like it. I don't talk politics. I have no opinion about politics.
But we'll leave that one alone. Modeling Fool Money. For more, go to fool.com.au. Speaking of the economy, and this is one I know is very near and dear to your heart, basically because you're a bear and you hate property.
We saw this week... I don't hate anything. That's why I said that after just kept talking. But this week the NAB was the last of the big four banks.
After promising not to, NAB has come out and increased the variable interest rates pretty much across the board. Every NAB customer is going to be paying more as a result of this announcement. Now we've talked a little bit in the past about the reasons why. Just to recap that a little bit, what you think about after the NAB kind of rise goes through.
So when NAB actually made that statement that they were going to keep it at a hold and not increase it, I thought it was very bold. For a CEO to do that, it's actually very bold. And the reason we've talked about this before, and for those who listen to us before, this is going to sound like a repeat, but for those who haven't, this is a refresher. I think the magic here is that let's say we get 50% or 60% of our funds that borrowers get, they come from, let's say our depositors, or local economy, right?
And then let's say 40% of the funds come from overseas, what they call the wholesale markets, which is basically going overseas and saying, can we borrow money from you? Right. So they take three-fifth of money from Australian depositors, and two-fifth of 40% by going overseas saying, hey, can we borrow money from overseas? Because there's not enough deposit cashier to fund all loans that Australians want to take out.
Exactly. So now when that happens, then you have to pay the overseas folks interest, right? And that's the US, which is one of the world's largest money markets, then you're going to be, you know, the amount of money interest you're going to be paying is going to be decided by, to at least a large extent, by the interest rates prevailing in that economy, or in this case, the U.S. Fed, right?
So the U.S. Federal Reserve, which is essentially the RBA equivalent. The U.S. Fed, which is the RBA equivalent, which means the cost of borrowing money from overseas is going up.
And while RBA here has not, which basically means the cost of borrowing money locally, two pieces, two ingredients. The first ingredient costs the same, the second ingredient costs more. The cost of goods goes up. Either you've got to increase prices, or you've got to have small margins and make less money.
Exactly. And as a bank CEO, you've got to be really, really bold, because your shareholders will come with pitchforks, knives, and chainsaws, and whatnot. If you're making less money than last year, right? I mean, those NAB shareholders want their dividends.
They want their dividends to go up. And I mean, as a shareholders, that's what we want, right? So there's a fine balance here to strike. I mean, I thought NAB was bold.
And I think all banks have no choice but to do this. And if we want our banking system to work the way it works, and it works well, this has to happen. So I think it's not unexpected. I would say that if you didn't pay extra interest for the last one year or whatever, you know, six months that NAB gave you it, you've got to benefit.
So again, this headwind is going to be there. And it's going to be, I think, you know, we have a rising interest rate environment. So I think that's the headwind. And I expect that to be there.
You know, that's largely my take on property is that your cost of borrowing is going up. And if your debt loads are very high, then your cost of servicing that goes up. And that, therefore, has other impacts, which is, you know, if you're paying more, you service your loan, and then you have less money left in your pocket, which therefore means you have less money to spend, which therefore means there's less money to go around, and, you know, and so on. So it's one of the headwinds.
But again, employment numbers going up, and, you know, on average household income going up, which is good. We hope that household income keeps going up enough to offset the rising cost, because as you say, that combined with the potential removal of negative gearing, a whole lot of concerns around what happens to confidence. I've got an optimist, but I have to say there are always very credible reasons why things could go badly. 2019 is a year where a couple of them seem pretty credible, and more importantly, if they happen at the same time and compound each other, that's kind of when you start to worry a little bit about.
I don't particularly care about housing prices either way. I'm not an investor. I don't care at all. What I do care about is that if the wealth effect increases the likelihood of a recession or some sort of economic downturn, that would be a pretty ugly thing to have happen.
Absolutely, yeah. There's a lot of things actually coming together at the wrong time, maybe, is the thing. You know, again, there are benefits to house prices going down. House prices going down, which is going to make it more affordable for the people who are actually out of the market, right?
But, you know, again, I don't want to get into political debate about this, you know, but, yeah. I think there's some headwinds, and you've got to watch for that. But, you know, there are good news and bad news, and that's what, you know, mixed up. We all want all good news all the time, but, you know.
That's fair. That's fair. Modely Fool Money. Financial advice for real people.
Not trust fund TVs. Sign up for the newsletter at fool.com.au forward slash triple M. From now to Afterpay. Do you like how I did that?
Financing, spending, economics. It's almost kind of the same thing. Did I get away with it? Not sure.
That counts. We get participation marks here at the Modely Fool Money podcast. Commendable. Well done.
Your praise goes a long way, Dom. Afterpay was in the news this week, and it's one of those kind of perennial headline grabbers. There are a whole lot of different reasons. This week it was about whether or not Afterpay was using some data from the electoral roll that, depending on the allegation, depending on the reading of the legislation, it shouldn't have been using, at least not for that particular purpose.
The electoral roll does allow, or the Australian Electoral Commission I should say, does allow access to the electoral roll for particular purposes, but not for just any purpose. And there was some concern that maybe Afterpay, and as many others caught up in this kind of potential concern, are using the data for purposes they weren't supposed to be using it for. So that was in the news. Another kind of, you know, one more bear strike against Afterpay if you're so inclined.
On the flip side, this is a business that's still growing like a weed. It has made some decent but still very, very small strides, relatively speaking, to the US. Look, I love the Afterpay story. As a business person, as someone who loves business and likes to see some Australian companies who kind of, you know, take on the world and win, Afterpay as a business literally created a brand new way of paying.
It convinced, that's the majority of merchants, absolute truckload merchants to accept this new way of paying. Australian consumers have adopted it at a massive rate of knots. This is an unbridled success story of an Australian company who have innovated really cleverly. This isn't necessarily new software being written, it isn't necessarily new ways of working necessarily.
If you can take on Amex, Visa, MasterCard, you know, whatever else, pick your debit cards, Google Pay, Apple Pay, you know, many other options. To have absolutely blown a hole in that and found your own space is pretty bloody impressive. The concern with Afterpay of course is, A, does the business survive in the same form if it's regulated differently? And B, is it worth the money that's being charged for its shares?
So, we can leave your overall question aside, I think it's probably not a big deal in the overall story. Maybe it's okay, maybe it's a small amount of money, it's kind of material. But the Afterpay story does, people love it, people love hearing about it, talking about it. It's the one company on Twitter, if I've ever ever given up something negative, I get jumped on by half a thousand Afterpay fans who refuse to be talking it down.
So, just give me your thoughts on Afterpay as a business, where it's at, how you're seeing the company, and then to some degree how you're seeing the shares. I want to take a first day to cut out your segway. We're going to disagree with two things. Number one, there's so many stories on Afterpay, and I read half of it, but what I found interesting about this fact was about data privacy.
I think that's something that I've seen a lot spoken about lately. That's a segway. She's taking this on another tangent, but keep going. So, data broking is something that's receiving a lot of attention.
I think Europe was the first one to come up with GDPR, which basically tries to protect users' data and how the users' data is being used. So, GDPR was a general something, privacy something? Yeah, it's a privacy regulation, which is basically trying to give back the right of the data to the users at a very high level. So, I found that as an interesting take.
This is a popular culture thing, right? I mean, when people talk about stuff, it comes into public culture and politicians start talking about it, and then there's regulation. And so, I think that angle was interesting. The other thing I would say is I don't think Afterpay is actually in the same space competing with Visa, MasterCard, Apple Pay, Google Pay, or whatever else is there, because I think none of those other guys are actually in the space of buy now, pay later, right?
They're not in that space. They're basically just facilitating contactless payment, or they're basically just facilitating the move from cash to electronic ways of paying. I think the innovation here was basically bringing consumption forward as much as you can, bringing consumption of small goods forward by some amount of time. I think that's the innovation here.
And so, it's basically another form of debt, right? You can call it even payday lending type of approach, right? So, this sort of thing has existed in one form or the other. What they did, I think, is they appealed to certain demographics and did it really well, using the smartphone and then, of course, building the network of retailers.
I think that's a really big checkbox. So, I will take a slight disagreement. In my mind, the competition piece is it's a different way to pay, and they've wriggled their way into a payment system, I'll call it what you will, where, yes, that's right happening now, but to some extent, those consumers, if they stay with this product into their 20s and 30s or whatever, most people have an Afterpay account or seem to have an Afterpay account these days. The authorities were cash credit card or debit card, now it's cash credit card.
To some degree, every dollar being spent, there's a portion of that that would have been spent using other payment methods that are now being used on Afterpay. I would argue. I think it's purely incremental almost by definition. Sure, sure, but what I'm saying is that, you know, it's incremental in the sense that, you know, maybe these people would not have spent this money, and they're actually spending this money because they haven't got this form of loan that they can get, right?
So, that's something that's creating a new demand that probably did not exist. You're right to say that, you know, if the people who are using it today continue using it in this form in the future, then it is an impingement on the territory of the visas and the Master Cards, right? I look at the other payment technologies as different. because they're just enabling the same thing to be paid in different ways.
If you're looking at Google Pay, it's basically allowing your MasterCard to be used using Google. So what I feel here is that there's a couple of things. The early story from the U.S. is looking promising, so I think that there's a lot of promise there.
The question is not clear. Is this going to get regulated like any other debt instrument would? And I think that's the risk. And the other thing I've seen is that Afterpay makes a pretty decent chunk of its revenue from late fees.
So that's pretty significant, right? I mean, what does that tell us? Is that people just forgetting about it, or is that people who are not able to pay and therefore paying these late fees? So I feel that regulation might happen.
They might get regulated, and I don't know what the impact of that is. So I think I find it fascinating. It's a fascinating thing. I don't use it personally.
But again, it's fascinating. You know, I was skeptical of it. And I'm less skeptical now that they've been able to find their way into the U.S. and they're looking to find their way.
They bought a small company in the U.K. They're looking to roll out in the U.K. And it could be one of those things where you roll out enough that actually legislating it in a way affects consumer moods so much that no one wants to do it. So unless there's a bad outcome from all of this, then...
So I'm a little less bearish right now. I'm not bullish. I'm less bearish on Afterpay. That's my take.
Fair enough, too. So I mean, again, in the long term, how is it going to make money? It's making a cut of the... It's a pretty hefty cut that they're making of the retailers, right?
They're making hefty interest rates. So the question really is on the money that they're borrowing to give to people and then, you know, not give to people but to give to the retailers. So the question really is, this is basically like... This is basically a banking operation, right?
So, you know, this is basically the equivalent of the net interest margin we're basically making. It's not a transaction-based thing where, you know, more people are spending more and therefore, you know, you're making a cut. It's slightly different to me, in my opinion. Afterpay, I would look at it like a bank.
They make a cut of what's being spent. But they also have the risk that it doesn't get repaid. So as long as it gets repaid, they're making a set percentage of the fee by definition. They're taking 2, 3, 4 cent from the retailer.
If everyone pays back, that's exactly what they do get. No, no, it's not exactly that, right? So they're getting 5% from the retailer. But for that, they have actually to borrow the money for which they may be paying 3%.
So they're basically making a difference only on it. Yeah, to some degree. They get to use the cash multiple times a year, right? That's a different.
So then you'll charge versus a separate transaction. So that's the point. Yeah, but I mean, yeah, sure. Yeah, yeah.
So, okay, possible hold. I'm going to make you ask. So I would put it right now as a hold. I mean, yeah.
I mean, I wouldn't sell it if I have it. I think it's I don't hold it. But, you know, I'm still not convinced. You're not rushing out to buy it, are you?
I'm not rushing out to buy it. I'll put it at a hold. Yeah. Fair enough.
I'm the same. My view, I think I've probably seen on the podcast before, I'm pretty sure Australia's not worth the current price. If it's successful in the US in particular, it's probably worth a hold up one, maybe three, four times the current price. If the US business ends up being unsuccessful, frankly, they'll get overpriced at the current price.
I think it kind of, to me, it was like zero or five, seven years ago when zero was 50 bucks. It was one of those businesses that had a hold up into it based on what we're doing in the US. It wasn't able to break through in the US in a big way, but it's not yet. And the price kind of fell, and then it's kind of profit's growing back into the previous price about now.
So you've probably broken even over five, it's just pretty distant, not a terrible result. But to some degree, that was the expectation that was built in that didn't come to pass. Now, if I can make it come to pass, and if zero was successful in the US now with $200 a share, zero had that issue, I may not be able to get to the same result. I think that what I'm allowed is, in the zero case, there was a nimble competitor in QuickBooks there, which they had to defend.
It's not clear to me who the competitor is for them in the US, maybe, you know. After you, mate. Yeah, for after this. So maybe that's the advantage they have, but you're right.
I mean, if somebody wants to compete with PayPal, for example, wants to compete with them, then it'll be hard. That's the question. Yeah. Real money advice from real people, not just a couple of dicks with a Porsche.
Get more at fool.com.au forward slash triple M. Speaking of disruption, speaking of competing, speaking of digital money, how's that for another segue? That's great. 2019 is going to be my year for segues, mate.
I'm all over this. You're right. All over like a fact you don't take. Mate, digital banking.
There's a whole lot of digital banks that have sprung to life recently, either organically from other businesses or businesses that are starting up specifically to be digital banks. On one hand, I kind of feel like we've seen this story before. We had the ING Direct that came to Australia. We had UBank from now.
We had Dragon Direct. There's plenty of online banking. It's, of course, been a very, very big hit in Australia. We are one of the fastest technological adopters in the world, and we've certainly done that with internet banking.
On one hand, what's new about online banking? Not much. On the other hand, there's a whole lot of new banks that are seeing some opportunity somewhere. So tell me, is this an echo of last time, full of sounding fury, signifying nothing, or is this genuinely a revolution?
Should banks and banks actually hold us fear of digital banks, or is this just more of the same and business will go on as usual? That's a difficult one. Like the Volt Bank got its license to become a deposit-taking institution. They also got the $250,000 deposit guarantee of the federal government.
So that's a big deal. Now the question is, can they get deposits and get those deposits? How much are they going to pay in terms of interest? So becoming a deposit-taking institution gives you flex in terms of your lending capacity.
So it's a leg up for them. I mean, it's hard because in a scenario where I think the lending growth is probably going to be slow and steady, not increasing. So it's going to be a very competitive environment. So I think it's going to be a competitive environment for everyone.
The one that I thought was interesting, and I don't think the license has been approved, is the one called WeBank, which is, I think, majority owned by Tencent. Except for WeChat at the same time? Yeah, WeBank, WeChat, so Tencent. That one I find interesting because it can be capitalized by a very big company.
That's a mammoth company. And there are other risks that come with that. So there are maybe some sovereign risks involved with letting a big company with such cloud come and have open a bank. So I think if someone came and wanted to disrupt it and came with, you know, eceded with capital, then it could be very disruptive and disruptive for our incumbents.
Net result might be actually good for consumers, but yeah, you'll see. So I find the WeBank news interesting, but I don't think they have a license yet. They file a bunch of, you know, PAC, you know, not PACs, but, you know, the registered trade names and things like that. That I think is interesting.
And do you, if you think about that, what does this mean for our banks, if anything? What's your view on digital banking with kind of much of disruption? Kind of on one hand, it's easy to think, gee, the banks are old and stayed and not doing much, and there's a new breed of disruption that's happening everywhere else in the world. Yeah, banking's next.
On the other hand, as I said, I kind of feel like we've kind of seen this story a little bit before. I feel like banking, digital banking is kind of a killer app, to use the phrase. I feel like if Google Bank gives me online banking and net banking and Apple Pay and Google Pay and I kind of don't need to change my account to a WeBank or to a Vault or to somebody else who's coming out of the blue, unless I kind of give you a really, really good reason to. ING Direct couldn't do it.
In fact, ING sold out to INZ that now owns ING Direct in Australia, which is in the other banks. It seems like this Russian card hasn't really caught whole, partly to give the banks credit, because they've responded really well to it. They're among some of the technological leaders worldwide when it comes to banking. Is this another echo of a could or should or would, or is this genuinely something they should be worried about?
Well, I mean, again, I would not be worried about it. I mean, I think the opportunity here is that, you know, the operating cost for an online-only bank should be lower than a big and motor bank, right? Now, you would argue that, you know, the same would have been true for, say, ING and so on. But I think ING is a different beast in some sense, right?
Because ING, I mean, is a big bank, is worldwide operated, has, you know, probably comes to a different culture. And maybe a WeBank comes to a different culture. And, you know, if they want to be really aggressive, they could actually up significantly the interest they're willing to pay on deposits and therefore grab deposits, right? So I think a big foray in online banking from a company like Tencent, which is an online leader in so many different things, can actually change the game.
Whereas, you know, the things that they've done, for example, using WeChat in China is pretty amazing. So they've really created their own ecosystem inside WeChat. So I think that, I think I would not, I would treat an online entry by WeBank as a very significant move. I don't know, vote well enough, you know, it's a private company to have a company.
I know that Tencent is a very innovative company and therefore their entry could mean something. So it's almost that kind of tech heritage to some degree, culturally, call it what you will, the way of working in that business because it's so different from what we're used to from financial services that maybe it's kind of just going to bring something different to the table and maybe we can't foresee, but it's different from Bank A trying to revolutionize Bank B. If you're a tech company trying to revolutionize payments and finance, it's a different situation. And it's a very profitable tech company.
It's one of the largest tech companies in the world. The people that don't realize it. And if one of our listeners said, hey, that Tencent thing sounds interesting, how can you get access to Tencent from Australia? You can, actually.
You can buy an ETF from Exchange Trade Fund from BetaShares, which is called Asia, which holds... What's that called Asia? That's the ASIP code? It's called Asia.
It's the Asia ETF. A-S-I-I, okay. Yeah, and the code is also A-S-I-E. Funny enough, they had the code, I guess, available.
Nice. That holds the 50 ex-excluding Japan largest tech companies in Asia, which are primarily domiciled in Asia, whose businesses in Asia can get exposure to Tencent. So the 50 largest companies in Asia, ex-Japan and ex-financial, do I remember that correctly? It's tech.
It's only tech. It's tech companies, and I think it's ex-Australia as well, it's basically the Asia component minus Japan. Cool, nice. And we would say that's probably a good exposure to have?
I think it's a great exposure to have, if you believe in the rise of Asia over the long term. And it's a great exposure. And that's part of a balance portfolio. Of course, yeah.
Like anything. Correct, correct. That is not. Market, market, index.
This is Motley Fool Money. Subscribe to the free newsletter at fool.com.au forward slash triple M. And let's move on to one of our favorite parts of the Motley Fool Money podcast, and that is a dip deep, deep, deep, deep into the Fool Mailbag. I've already given the details, so I won't bore you with that again, though.
We may do it towards the end. We love hearing your comments, questions, feedback, and suggestions. And we've got a heap over the last couple of weeks. And as I said, this is the first one we've been together.
For a couple of weeks, we're going to work through the Mailbag over the next two weeks, maybe even three, if we get some more good questions. Please throw them at us, as always, if that's what you want to hear from us, that's what we want to talk about, rather than making it up ourselves. As much as we talk about property, as much as I love bagging about apples, because that's what we both like to do, we'd much rather actually get your feedback and suggestions. All right, so here's the first one, Doc.
A question. Hi, guys. I love the show. I'll tell you what.
I know how sweet to talk about that. I won't let you swing, but I will offer that suggestion. But your thoughts on Retail Food Group? Well, it will serve your sense.
I don't imagine it's changed too much. I'm just going to store for the time while I talk in the code, and I see the price is exactly still putting in the sense. So there you go. Tell us your thoughts on RFG.
So number one thought is that, you know, buying something because there's speculation that somebody else is going to buy it, and therefore you're going to buy out price, which is going to be higher than the current price. That's a gamble. And, you know, the odds are that you win or the odds are that you lose. Maybe they're 50-50, I don't know.
With Retail Food Group, I think there's a real, I think there's debt problems that they could deal with. Most specifically, it's a covenant that if they breach, the banks can effectively foreclose on them. So it's partly where they can afford to repay it is almost the secondary issue. The first one is they make some promises to the bank that basically say, hey, you can call our loans if we don't do these three or four things.
Right now, they can't do a couple of them unless the banks can usually be kind. Yeah, that's right. They're actually hanging over their neck. Yeah, and so there's some earnings that they need to meet, and they're probably going to be negative in their earnings given their scenario with how they've been selling their franchises.
So, no, I mean, it's not yet a turnaround in my view. It's kind of far from it. It's basically in the sick bay. I'm calling it an ICU.
And normally, look, it's funny you say that you use that analogy, because Warren Buffett has talked about buying great business when they're on the operating table. So I can't keep that medical metaphors going. I think what I'm hearing you say is it's not necessarily a Buffett quality business. This is not a great business that's in the ICU.
It's probably an ordinary business that's in the ICU. An ordinary business in the ICU is pretty risky, pretty dangerous. So I don't rule out somebody might buy it, but I don't want to buy it for really cheap. Yeah, plenty of speculation.
There wouldn't be the first company who had buyout rooms and then went broke two months later. I can't disagree with you, Doc. I think it's one of those scenarios. Look, you made a heap of money from selling franchises, and right now no one wants to buy an RFG franchise because there are too many of them around the country.
If you can't sell franchises, and that's where a large chunk of your profit comes from, then you're kind of hiding to nothing, and that's the problem that RFG face. They look really, really cheap. They just have to say the value of 100, and you're looking at that going, oh, what do you reckon? As you say, the chances goes to zero, effectively, because of a bank, a covenant issue, or actually because they lose money in the bank, so they can't pay the loan back, which is possible.
Every possibility it gets put in the administration. Now, I will say for what it's worth, that Chinese takeover, the proposed or the speculated Chinese takeover for only part of the business, which was the cross-peats business, that could actually be more than what the current market cap is, for example. So there are some real possibilities when it comes to value creation there, but this is entirely and completely speculation. So there's absolutely a scenario in which this is worth a lot more than 30 cents.
There's a scenario where it's worth zero, and frankly, not that you're not right or anyone else can really put proper odds on that. This is one of those ones where I feel like if you're an investor and you want to play this game, you kind of have to play the odds across a large number of examples of this. So I never buy RFG and say I'm buying on basis speculation. If you want to, when you think you're good enough at buying takeover arbitrage, then maybe, you know, they'll probably say no still.
But you want to do it over 10, 15, or 20 examples, make this a core part of your portfolio, knowing you're going to lose on some and on others. That's a pretty tough game play. So do the summer parts game. Yeah, exactly.
Do the summer parts game. Yeah, and you need to repeat that many times. Are you choosing avoid still? I would say it's avoid.
All right. Modely for me. Let's move to the next one from Jason on Twitter again. I love it.
Hey, Sam, we've seen the podcast, and I agree with your point about the ASX indices being far too weighted towards banks and miners. So I'll stop there very quickly. I'm going to say for new listeners, we hope there are a few, you know, many, many people join us every week. Firstly, what we've said about, we love ETFs, we love broad-based ETFs.
Ordinarily, we'd be saying to most members, hey, if you want to pick stocks, buy a broad index, you know, something that covers roughly the entire market, an ASX 200 or an S&P 500 index and go with that. I'd love to give that advice. It's cheap. You get the market return.
The problem is that banks and miners are at 45 or 50, depending on the week, a percent of that index. So you're really not buying a diversified broad index. You're buying a concentrated exposure to banks and miners. So he said in the past, we really struggled with saying people just buy the index in Australia because it does feel too concentrated.
So Jason's saying he agrees with that, so we always have people agreeing with us. Oh, awesome. Jason's obviously very smart, man. Yeah, we love Jason.
Probably good to look into it. Yeah, he's great. But then he says, okay, so what are your thoughts on equal-weight ETFs rather than market-cap-weighted ETFs? And again, if you have a heads-up, market-cap-weighted ETF is the standard ETF.
It basically says, hey, if BHP is 10% of the value of the ASX as a market, then it's going to be 10% of the ETF, and it's weighted that way. So BHP shares go up a couple of percent. That is a higher weighting than something that's only worth 0.1% of the market, in which case that you only get a very small component. And equal-weighted ETF would say, right, 200 companies, each of those is half a percent of the index.
So whether it's BHP or the 200 smallest or the 200 largest company, better put, then they will go up equal components based on the share price rise of each company. So if I've explained that well, if I haven't been able to clarify, if I have, what are your thoughts on equal-weighted indices? I think equal-weighted is interesting. I mean, a couple of things here.
I mean, I would like to see actually some back-testing results to see actually how it looks. Without saying, you know, how an equal-weighted ETF would have performed historically over the long term. Right. Would give you a good sense of how they may perform in the future.
Again, no past results, no guarantee of future results, but it's a good sense. I think that's number one. I think the advantage of this approach would be that you get a more, you know, sector balance by doing that, which I think there's some advantages there. But I like the idea as such.
That said, you know, there are many different types of ETFs available, right? So, you know, you have these equal-weighted, you have sector-weighted, you have got to actively manage. So as an ETF gets more complex, you know, you just have to, you know, cast a very clean eye and have a good look at it. So without having a good look, you know, I don't know whether this is a good one to have, but, you know, the idea sounds interesting to me.
I know that there are equal-weights available overseas. Yeah, I'm stuck on this one, I have to say. It does help offset the issue of overconcentration, and maybe all that's being called, that'd be an interesting way to go. I have to say, I don't...
Part of the value of market-weighted indices are that the biggest companies are the biggest because they're going to be the best and the most profitable and a whole lot of other things like that. And so, to some degree, if the point of buying an index ETF is to give yourself the market return, which we think it should be, then once you start to choose any other strategy, you're kind of choosing an active strategy with a passive instrument. So, come on with those scenarios where, I mean, there are more ETFs in the US now than there are stocks. There are so many different versions that you can have any other active strategy you want.
So, ETFs become basically a fee-collecting machine, which is exactly what we hate about the financial service industry, is that everyone's trying to fly away from the ticket. The idea of a very low-fee broad-based index is to replace the idea of your stock picking, or to supplement if you want to have a broad-based portfolio with a relatively market-matching instrument. Once you start to go outside, you start to make bets and say, well, do I think a market-weight index would be better or worse than a market-cut one by this or the other reason? So, I think that's...
I would... It's an interesting idea. I love the theory. I love chatting about it and weighing up the concept.
I have to say, I'd probably not be super keen on it. I don't know that I want the 200th largest ASX company to have the same weight as the 4th largest or 10th largest ASX company, in the sense that you're now betting actively that the small companies will do better or as well as the larger companies. And that may be true. And as you said, if you want to do some back-testing, that's probably the answer, although, again, that assumes that the past is in the future or vice versa.
Forced to choose, maybe it's slightly better than a pure market-cut one in Australia. In the US, I'd say, no, I'd absolutely go market-cut one on the S&P 500. That's the smartest thing. You don't have the concentration issues.
Here, if I was going to go, I'd probably actually hedge my bets and buy half of both, that's what I'd probably do, I think, because you're not doing yourself out of a favor of the way. If that's the answer to ASX indexing, which is, hey, I want to buy a broad passive index, I'm not comfortable with the market-weighted, maybe it might help to offset some of those risks. So maybe I might do that if I was so inclined, but I'm not a favor in general, particularly in the US, but maybe it has a place here in Australia. But maybe the solution to that is just buy the ASX 300 ETF, The Vanguard has an ASX 300, a little bit better than the ASX 200.
So the all laws for example is 500 companies-ish, and it moves only incredibly, incredibly slightly differently into the ASX 200, because the top 10, the top 20 companies are about 66 million. The next, I think the other 100 companies are so small in comparison, it's probably something like, I'll make this up, but something like 5 or 7% difference, because the market capture are adding so incredibly tiny, because the market capture is so small so fast, it's very, very hard for those small to make even a modicum difference. Mix it with other ETFs as the other solution, right? Mix it with other ETFs.
Oh, join my best services. Oh, well. And buy, buy, buy, buy. I'll be the same with self-promotion as we get towards the end of the podcast.
Motley Fool Money. One last one we had from PowerPig on Twitter, PowerPigDT. I assume DT is PowerPig's initial, so maybe his name's actually PowerPig or her name's PowerPig and DT is just something else. PowerPig says, I love the podcast, guys.
I thought Telstra shares about three to four years ago at 563. Oh, dear. I only exactly like it, too. I can't say they're going up again to those levels.
Do I hold out, or is it time to sell? Also, what are your thoughts on Westfarmers now, post-the-colds being leisure? Hold or sell? Now, I will say that's something that kind of gives PowerPig's view away, because it's a nice thing we should buy.
So hold or sell are the options that PowerPig wants to know. That may be because he or she already owns Westfarmers, I would assume. Let's start with Telstra, mate. I'm loathe to ask you the question because sometimes I'm just with Tesla, Tesla, Tesla.
But look, you're a noted Telstra bear, but at the current price. Can you see you a clear saying to PowerPig, hey, I'm sure you don't give personal advice, this is a general advice, only. Should our listeners be holding their Telstra shares, or is it time to part ways? So I'll answer this in two parts.
Since the question is, should I hold or sell? I mean, it's already at the point where they don't think it's a buy. To be fair, PowerPig already owns them. So do they leave the share in the portfolio or do they get rid of them and use money for something else?
So I'll answer this differently. I'll say, just to be more nuanced, I think if you can find another company or instead of companies that you think are going to deliver higher returns than this one, then you should absolutely sell it. Because if you can find another company that's going to give you better returns, or a couple of companies that are going to give you better returns, then why do you want to hold this? Even though it may be market-beard.
So that's the thing. That's number one. With the exception that you might pay tax and other things. So there are certain reasons why you might want to.
No tax in this case. This is a perfect one, right? This is a perfect one. There's no tax issues involved.
If you can find something that's going to do better than this, absolutely sell it, lock the tax, and be done with that. That's number one. Do I think the current prices look reasonable? I'll give it a decent amount.
Does that hurt to say that? No, it doesn't. Come on. No, it doesn't.
The thing is, at the $3 mark, it seems like it's a cheap stock. Is it cheap enough? It probably will give market returns, is my guess, at $3. I think once it starts getting to $2.50, I think it's cheap.
$3, I think it's okay. Yeah, so I think my view is that it has got a smallish chance, maybe not a smallish chance, maybe a 45% chance of giving your market matching to being returns, is my guess at this point. That's fair. Yeah, look, I own Telstra.
It's a buy price, it's a share advisor. I share your view of the current price in particular. I think what I got wrong when I bought a higher price and recommended a higher price so we do get things wrong. I will say what it's worth if we are bidding the market overall, so we get some calls wrong, but overall if we get enough right, we're bidding the market, which we are a share advisor.
Telstra for me is a, the thesis was always the mobile business was strong, the landline business was weak, but the mobile business would well and truly offset, the growth that would offset the decline in the landline business. And what I completely messed up was the timing and the size of those changes. So I still think that's going to be true, by the way, I still expect the mobile business to do really, really well. The problem was there was too much of the value of the then Telstra in that landline business that I've ever added.
So that's the mistake in the past. I would say how big, the price you paid, you should ignore, you're going to anchor it all the time, very hard to do, because you're seeing some possibly going, oh, this really sucks. The question is if you cash out today, they would buy in again. And at the current price, I do think that most of the bad thing is hopefully priced in.
I expect fully that 5G will be a boon for Telstra. I think it will continue to do well. It will continue to dominate the mobile space. And as long as it does that, I think it's going to be a good investment from the current price.
I could well still be wrong. But that's my view on balance. I think the risk of a reward is in Telstra's labor. I'm going to go to Westfarmers then and Coals.
It probably doesn't know about Coals, particularly although I assume he or she owns some Coals because of the merger. So let's look at Westfarmers and Coals. Westfarmers, of course, famously owned Coals. People say Westfarmers are Coals interchangeably.
Westfarmers have always been an investment conglomerate by a retailer. And so I wasn't surprised to see it demerge the Coals business onto the market. It's going to basically put its money where the best opportunities are. It decided that Coals wasn't it.
And so it was going to give those Coals shares to its shareholders and let them make the decision. Westfarmers, of course, still owns Bunnings, Kmart, Target, some Coal business, some insurance chemicals business. Big, big conglomerate Westfarmers. Your thoughts on Westfarmers and all Coals?
I actually don't have much thoughts on Westfarmers and all Coals. There are two companies I mean, it's just really hard. So you need to be value conscious. You know, the price you pay at some price is probably a good buy.
I just don't know what the price is. That's fair. I think Westfarmers is... I think you're right.
So we've got both of them as a buy currently at ShareAdvisor. We've had Westfarmers already on the scorecard before that. Also a couple of other services. For me, I'm actually...
It still buys as a standard recommendation, but I am looking forward to this current earnings season to see what the numbers are. I think that's a lot more about the two businesses. I'm probably keen on Westfarmers than Coals for growth. Probably keen on Coals than Westfarmers when it comes to yield.
For me, if you held the shares and you can't get personal advice, I wouldn't be selling them until I saw the results of this earnings season and then working out what comes from that. Modely full money. One last piece of feedback from members, then we'll wrap this up. And it was just a response to one of our previous podcasts.
I know you don't have politics, but I'm going to drag you back into the fray or at least mention it. You can say, Mum, if you want. We've got a question or a comment from the podcast. And it says, somewhat rhetorically, or maybe pointedly, free trade is best.
Isn't it only if all countries accept this and trade freely? It's not only in comes to tariffs, but export subsidies, e.g. the EU. Now, we made the point in previous podcasts, maybe I made the point, I'm not going to drag you into it, that we know economically that tariffs, subsidies, quotas, all those kind of protectionist measures actually retard growth and the removal of those increases growth.
That's been the centuries and centuries, I want to say four centuries probably, of history suggests that when trade barriers are lowered, then international trade flourishes and when international trade flourishes, living standards improve and increase. So I accept the common comment that has been made. Isn't it only if all countries accept it? Well, yeah, kind of it is.
But we know that it's lowering, relative lowering of barriers. Every, well, not every single one, I don't think we can be that broad and that definitive. But generally speaking, whenever a trade barrier is lowered, even if only in some areas, some categories, international trade increases, improves, standards will be improved. The reverse is also true as barriers go up.
It retards the growth of the global economy. I think you can say, well, not allowing unless you do, or you've got barriers, I've got barriers. And I think we shouldn't be patsies, again, country by country, region by region. You can say, well, not allowing until they do, and that's all fine.
But to some degree, all of the global free trade networks with NAFTA, whether it's the Australian free trade, whether it's the new, what's the one now, free trade, if we want to call it that, lower barriers are better than higher barriers. And the more we can have those come down, the better. If they go back up, even if it's justified, even if on a moral ethical level, you say, well, they're charging me, so I'm going to charge them. It's actually negative for everybody.
So it's one of those things where sometimes you might not get a win-lose or a lose-win, but a win-win is just, if any barriers come down, then everyone is better off. I think as an economic, I don't think if any serious economist would disagree with that theory. I just want to say free trade, I'm just going to say free trade, and then we win, right? I have nothing else to do.
I think that's a good point. I know that's a good question's point. I think it's a fair point. I just would say, let's not lose the forest for the trees, right?
We can say, well, I'm doing what you do, and we're all poor for it. Sometimes being right is expensive, sometimes being... I know if I can use that word is actually better often. Maybe sometimes just saying, well, it's imperfect, but as our boss would say, perfect is the enemy of good.
Sometimes we can embrace that, and that's probably a better economic outcome. Absolutely. Mate, that wraps us up. Our very first podcast together for 2019.
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