Alan Kohler and James Kirby – reunited at last!

Alan Kohler and James Kirby finally get the band back together in The Money Cafe to remember the horror of the global financial crisis 10 years on and discuss the recovery of the market since 2007.  The reunited pair talk about trouble at CBA and if it’s cost their position as kingpin, plus:
  • it turns out limericks are not from James Kirby’s hometown Limerick!
  • the 10th anniversary of the GFC, remembering the horror
  • if you bought at the peak of 2007, by now you’d have done okay on the US market, but not so well in Oz
  • you don’t know what’s hiding in plain sight, mortgage debt in 2007, what is it now? ETFs?
  • CBA’s in trouble, but it always traded at a premium, has it lost that position as kingpin?
  • Dominos didn’t impress this week – why did Don Meij overpromise and under deliver?
  • We thought Telstra would never cut their dividend – but they’ve just cut it!
  • Trump’s corporate friends are jumping out of Airforce 1 and quitting the President’s advisory council

You can hear previous episodes of The Money Cafe here or Subscribe to the series on iTunes.


Hello, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian. 

And this is The Money Café. 

The Money Café.

And, James, it’s so good to have the band back together, after your trip into…

It is good isn’t it?  Yes, it’s been too long, Alan. 

Where did you go?  Scotland and London? 

I went to Scotland and I went to London and Ireland. 

You went home?

Yes, I did.  Home to Limerick, yes.  I heard you had some appalling attempts at limericks while I was away. 

Did you hear that? 

Yes, yes.  I hate to break your heart, but do you know that limericks have nothing to do with Limerick? 

No, I know that. 

Oh, you know that, do you? 

Of course, but you know, I was just joining the dots.  I mean, I was…

Limerick should have harnessed it and have a limerick festival, etc., but they don’t.  But there you go, that’s my hometown for you. 

Well, it’s been busy while you were away, and we had some excellent people on The Money Café in your absence.

Yes. 

And then I was absent last week…

And we had John Durie…

And we had John Durie. 

…who was very good of course, and terrific on corporate Australia as you would expect, yes. 

He’s very sound, John.  Unlike me. 

Yes, he’s very sound, indeed. 

We actually speak at roughly the tenth anniversary of the GFC.  Now, I remember 10 years ago, it was August 9th when BNP Paribas shut up two of its funds. 

Ah, so that is what they’re defining as the ringing of the bell of the GFC, is it? 

Well, it is the key event, really.  I mean, obviously there were other key events, the main one being September 15th 2008, when Lehman Brothers went broke, but the thing that triggered it all…  I mean, there were events in July 2007, which was related to Bear Stearns, but the thing that really started it was BNP Paribas closing up, or freezing redemptions on two of its money market funds on August 9th 2007.

It was the headline that shook the world, wasn’t it?  Because we all, in Australia certainly, we got up in the morning, and here was this headline saying, “French Bank, BNP Paribas, major French bank in major trouble.” And it was like, what?  Where does this come from? 

So, what that resulted in was the banks around the world, really, losing confidence in each other. 

In each other, yeah. 

Because they suddenly realised that they didn’t know how good the assets of each bank was.  They didn’t know how much they were exposed, in fact, to the American mortgage market, which was in trouble.  Suddenly BNP Paribas, all across the Atlantic, in France, suddenly reveals that it’s exposed to the US mortgage market in a big way. 

So, that was really the epicentre of it all.  So, it started in France, oddly enough, but… 

It was all about America. 

…then all through the US, but it was all about French exposure to the US.  And here we are, 10 years later. 

And, interestingly, the US stock market, the S&P 500, from the peak in 2007, not the bottom, the peak in 2007, has produced a return of 7.7% per annum. 

Yes. 

Now, from the bottom of March 2009, the return has been about 12 or 13% per annum.  So, it’s been a wonderful return if you were able to buy at the bottom, pick the bottom, in March 2009.  But even if you bought at the peak in 2007, which was around about now, the actual market kept rising a little bit for another couple of months.  After August 2007…

Yeah, it went to November. 

…it kept going, a bit like Wile E Coyote going over the cliff, and sort of in mid-air for a while.  

Yeah, yeah, the legs spinning. 

And that’s kind of what happened.  But even if you bought at the peak, you still made a good return in the American market.  In the Australian market it’s not been a good return at all, from the peak, it’s been like 2%, and in fact, that’s on total return terms, if you’d include dividends.  If you don’t include dividends, the market’s gone down. 

Yeah, so dividends only really carried you if you were the type of extremely unfortunate person who went into the market in Christmas 2007. 

That’s it. 

It’s amazing, isn’t it, remembering 2009, how bad it was, and how desperate people were for a signal of a turn, but it has to get very, very bad before it finally turns.

Yeah, well, that’s right, but that does get back to the Warren Buffet saying of, “Be greedy when others are fearful and fearful when others are greedy.” Everyone was fearful in March 2009.  Everyone was fearful, and that was the time to be greedy.  But anyway…

Yeah.  So, just on that tenth anniversary, what do you think about the market setting now?  I mean, there’s a sense the US is heading for a correction.  If it has a correction, we will have a correction for sure, but is there anything worse than that on the horizon? 

Look, I don’t think so, but the trouble is that you don’t really know the things that are hiding in plain sight.  What was in plain sight in 2007 were the collateralised debt obligations and the mortgage securities all being dreamt up at the time. 

And the complicity of the rating agencies, which was crucial… 

Exactly. 

…because people said, “Oh, it’s AAA, so it’s okay.”

And so everyone knew about them.  People were writing about them, and it wasn’t as if it was a secret, but that was the problem, right?  And that was what caused the crash.  Now, what is it this time?  What is the problem this time? 

Is it household indebtedness? 

In my view, no.  What it is, is ETFs. 

But ETFs are still only 10% of the entire market, so they just mirrored their market.  Surely their market has to…

They’re are huge proportion of the new flows. 

They’re an accelerator, but can they be the actual…  how would they be the actual trigger of the fall? 

Well, because everyone would pile out of them at the same time, and they are the entire market.  So, look, I don’t know.  I’m just saying, I’ve been trying to think…

Yeah, it’s the new factor. 

What it’s the thing that’s going on at the moment that is hiding in plain sight that we don’t know about?  One answer might be ETFs, who knows?  But I don’t think we’re in for a crash.  I think the US market’s expensive.  It is due to correct.  As you say, if they corrected, so would we, but our market’s not that expensive, so… 

That doesn’t stop it falling.  That doesn’t stop it falling.  

It never does, does it?  Exactly. 

When Wall Street goes down, we go down with it. 

And it hasn’t stopped CBA falling this month. 

Yes, that’s right. 

I heard on the news last night that CBA’s down 6% this month.  The other banks are up.  Now, what I didn’t see on the news last night was that CBA went ex-dividend yesterday, which is why it fell yesterday but the fall for the month has been clearly related to the money laundering.

And the ejection of the CEO.

The ejection of the CEO. 

Oh, but of course, the thing is that CommBank always had a premium.  I mean, it was the superstar bank, on a financial perspective, not on a cultural perspective, but it had the numbers.  It had the ROE of 17% and it had the ability to lift dividends, etc.  So, I suppose what we’ve got to really think about now is has it lost its position as the kingpin of the local banks? 

And while we’re talking about CBA and possible loss of its kingpin position, what about Domino’s, which has also been another market darling. 

It has.  You met Don Meij, and like everyone you were really impressed by him.  Million dollar question.  Billion dollar question.  Why on earth did he overpromise and under deliver?  Why did someone with such a track record blow it?  Because he made it worse than it needed have been. 

Well, I guess it’s only human to get carried away, isn’t it?

Oh, no. 

But yes, you’re right, he did get… 

I won’t agree with that, because he’s not a typical human.  He’s a moneymaking machine.  He’s an extraordinary CEO.  He took this little Brisbane outfit, three or four outlet pizza to an absolute global company.  I mean, as I said, I’ve just come back from the UK.  Domino’s Pizzas are everywhere.  In the British press they refer to them as Britain’s Domino’s Pizzas.  You wouldn’t even realise they’re Australian. 

You’re right, I have met Don Meij and I’ve spoken to him, and I was impressed.  He’s an impressive character but I did think, here’s a bloke who believes his own bulldust, really, and that is clearly what’s going on.  Look he got everyone else to believe his bulldust, too. 

Yeah and that’s part of the package isn’t it, for a CEO?  You have to be endlessly on message.  Did you see the clarification about he’s selling shares.  He has announced he’s selling shares.  He’s got $100 million worth of stock, and on top of all their problems he has signalled to market he is going to sell shares which is almost worse than saying you’ve sold them, because no-one knows how much he’s going to sell, as a divorce settlement.  Did you see that? 

I didn’t see that?  He’s getting divorced? 

He is.

Right.  Well, that’s going to cost him money. 

Now, I only mention that in the context of why we’re trying to explain what’s going on there.  How he went off the rails etc. of recent times.  It’s just worth putting on the table.  The company itself has done that, because the brokers demanded during the week explanation about what was going on.  This was specifically because they were running a buy-back, and he announced he was selling shares at the same time.  Which is just… 

Right.  Yeah, but if he’s getting divorced it’s not necessary an indicator that he doesn’t think the company’s any good anymore.  He just needs the money. 

No, but it does indicate that he’s going to have to sell stock into a falling share price.  So, it’s just something that’s well worth thinking about for those two companies.  So, totally different stories, but I suppose the moral of those two stocks and this season, which is such a mixed season, and not as good as people thought it was going to be, the reporting season, but Domino’s and CommBank both have seemingly lost their special status.  I think CommBank could regain it.  I don’t know about Domino’s. 

Yeah, well, I think Commonwealth has a lot of work to do to regain it.  I mean, they won’t regain it just as a matter of course, it’ll depend entirely on the CEO that they manage to recruit and whether they can turn around the culture of the place.  Clearly, there’s a cultural problem at CBA. 

There is. 

And that’s going to take a lot of work to turn around. 

I thought that they would’ve done the more conventional massage, where they don’t admit he’s going to leave, and then in three months’ time they say he’s leaving.  So, in a way, I think Catherine Livingstone, I won’t say she played to the gallery, because she’s a superb chairman and we know that from her days at Telstra, Cochlear, etc, but on this occasion there was an element of that. 

My reaction was that she clearly understands the depth of the problem and that strong action is required, I would say.  So, we’ve really got to fix this fast. 

Well, if it’s a cultural problem – excuse the crying baby, folks.  We’re not in a creche this week, we are in our usual café, but it’s busier than we’re used to.  If it’s a cultural problem, that means that they cannot appoint an insider. 

Oh, precisely. 

They can’t appoint Matt Comyn.  Matt Comyn, who was so impressive and looked like he was going to get it, walk into it, actually.  They can’t take someone from inside the bank now. 

No, I think it’s a tragedy for Matt Comyn, I mean he is… 

He’s impressive. 

He’s a good guy, you know, and he’s worked hard.  He’s got himself into that position, and I think he’s going to miss out. 

Yeah, so do I. 

But look, he won’t miss out, he’ll get a job.  He’ll get a big C…

Oh, it won’t be in CommBank. 

It won’t be in CommBank.  That’s okay.  I mean, it’s interesting that Catherine Livingstone’s previous role, previous company, Telstra, also reported today. 

It did.  Yes, and she was chairman from…  She dug it out of a hole. 

She did. 

Herself and David…

David Thodey. 

…Thodey, they dug Telstra out of a hole in 2009.  She came in in 2009, and they came out and they said one thing that everyone heard.  It was the darkest days of the post GFC, the great recession, and they said, “We are going to announce our dividend, not just this year, but next year, and we’re going to not touch it and we will not cut it.” They built enormous goodwill off the back of that. 

Which has now come to an end.

And I think today she’s kind of jettisoned that, the goodwill. 

Well, they have. 

That Telstra has, yeah.  I mean, just a few weeks ago we both said, “They’ll never cut the dividends,” and every mum and dad in Australia depends on that fact that they never cut the dividend, and now they’re actually doing it. 

They are.  Cutting it to 22 cents. 

22 cents, yeah, from 31.  But worse than that, just to look at that a little bit more closely, there’s two things that have happened at Telstra.  First of all, they have thrown out a policy that they’ve had that’s saved them since the GFC.  The second thing is, the nature of that dividend in the future…  He’s throwing in special dividends, as well, which really confuses things.  It means people can’t estimate what the dividend yield is. 

Well, I think they can now, because I don’t think there will be any more special dividends.  That’s it, 22 cents is what you’re going to get, everyone.  And at $4 – today’s price is $4, roughly, $3.98 or something – it’s yielding 5.5%. 

Yeah, but it’s going to be yielding for the wrong reasons. 

No, but it’s now yielding 5.5%, so basically it’s adjusted already.  It’s come down from $6 to $4.  The market has anticipated the cut in the dividend, and it’s still yielding 5.5%, which is the same as both Commonwealth Bank, Westpac and the rest of them.  I know, but if I owned Telstra, I’m out of the money, because my stocks, it’s after going under $4, and there’s brokers out there talking about $5, so basically…

Oh, no, I’m talking about it as a buy now.  Of course, if you held them, if you bought it at $6 you’re in trouble, that’s true.  It was interesting the other day that NBN came out with its results, and in their presentation was a pie chart of NBN market shares. 

What exactly does that mean? 

Well, they’re all selling NBN, right?  Telstra’s new business…

Oh, the telcos’ shares of NBN.

Telcos of NBN, right.  So, Telstra’s new business is selling NBN, right, as well as mobile.  Basically that’s its business, mobile, NBN.  It’s got 52.4% of the NBN business, and of the new business, each week and month, it’s selling 55%.  So, it’s increasing market share of the NBN. 

Yeah. 

And so although it is a $3 billion hole in its revenue, because it’s not going to own the network anymore, it is actually doing okay in selling NBN.  The problem is with the old dividend of 31 cents, it was paying 100% of its profit out, and it can’t do that…

That’s right.  Well, yeah, and probably was never going to be sustainable. 

Well, you can only do that if you’ve got a monopoly.  You know, you actually own the infrastructure and you don’t have to do any marketing.  But if you have to do some marketing, well, you’ve got to. 

The thing is, if I was a telco investor, I would say, gee, if you’re looking for growth and earnings, rather than going into the sort of mire of Telstra, and it’s this gigantic company and all its complications and regulatory risk around the NBN, there’s TPG sitting there.  It’s a tremendous stock now, and it’s an enlarged stock after the takeover, and it’s got that clean sheet.  If you want the earnings growth in telcos, I would say well, look at TPG, and if you want dividends, well, look at the banks, because they’ve still got their monopoly.  It’s legislated oligopoly.  It’s still there.  What do you reckon?

You’re right.  There you go, folks.  You heard it from James Kirby.  Sell Telstra.  Buy TPG, sell Telstra.  There you go.  I’m not sure I’d support that, but I think it’s an interesting call. 

Yes.  Thank you for that, Alan.  Now, what else have we got on the agenda today?  Oh, yes.  Moving the lens beyond the shores of Australia across the Pacific to the US.  Something very interesting happening from a business perspective, from an investment perspective in the US, which is how Trump…  I mean, we all know he’s not delivering on his promises.  We all know that there’s sort of chaos around his office, etc.  But interesting things happening with the business elite, if you like, in the US, who went in behind him, because he was the latest Republican president, and why wouldn’t they give him a go?  What’s happened? 

Well, they’re all jumping out of Air Force 1 with a parachute strapped to their backs.  They’re abandoning ship. 

Who’s abandoned? 

Well, I can’t remember the guy’s name now.  The first one was…  Ah, ‘struth, I can’t remember his name. 

Well, give us a hint.  What was his job? 

Oh, it was a black guy who was running Mercks.  The CEO of Merck, the pharmaceutical company. 

Yeah, no sorry, don’t know. 

He was the first to quit the President’s Advisory Council after Charlottesville, where Trump came out… 

Oh yeah.  Okay, this is just in the last 10 days then. 

Well, last week.  Trump came out and criticised both sides of the Charlottesville problem, or, you know… 

Incident. 

…incident, and said that the left was just as bad as the alt right and white supremacists.  So, this black guy who runs Merck said, “I quit.  I’m off.”

He said, “That’s it.”  Yeah, yeah. 

Trump then tweeted criticism of him directly, and then all the other CEOs are starting to get out as well, and he’s had to actually now fold his advisory boards of CEOs. 

Yeah, that’s amazing isn’t it?  They were the top brass of…

Jamie Dimon, the CEO of JP Morgan has come out this morning or last night with a big letter to his employees, criticising Trump and saying, “I’ve had it with him now.”

Wow, yeah. 

So, it feels like the corporate world was behind Trump pretty much… 

Or was willing to back him. 

Was willing to back him, give him the benefit of the doubt, support him, get on the Councils.  Now they’re going, “No, we’re out.”

Yeah. 

So, I think that’s a really important… 

It is. 

The other thing is, the other people criticising Trump for what he’s been saying about Charlottesville are all the Republican seniors, like George W Bush, George H Bush, Paul Ryan, Marco Rubio. 

What would be amazing I suppose next would be if the guys, the big business figures who actually have jobs in the administration were to click.  That would really then move it to another level like Wilbur Ross at the Department of State, or Rex Tillerson, Exxon, at Foreign Affairs.  You’ve got to think that they may. 

Yeah. 

None of these guys are doing it for the cash.  They don’t need money.

No, that’s right. 

They don’t need more money. 

I think we’re at a bit of a tipping point now, with the relationship between business and The White House.  It’s very interesting.

Well, I think it will be very interesting, and also it’s at a most extraordinary time of the year for that to happen, because we’re just about to enter what is traditionally the most dangerous time of the year in US markets, September, October.  It’s when the crashes happen, Alan. 

That’s true.  It certainly is. 

So, we’ll have to see if that happens, but maybe we’ll leave that for another day, and we’ll come back to that next week. 

Well, yes.  Thank you for listening, everybody.  That’s it.  It’s been great to be back with James doing The Money Café with him.  We’ll be back next week, the two of us.  Until then, please subscribe to The Money Café on iTunes.  Leave us a review, tell your friends.  We’d appreciate that and we’ll see you next week.  Until then, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.