How Amazon helped an Australian retailer double in value

This week James Kirby and I discuss: 
  • The bitcoin roller coaster. Do these falls mean anything, and can a crash be contained?
  • How Australian investors can buy bitcoin-exposed stocks.
  • Will we see a mainstream bitcoin fund in Australia?
  • The year ahead for stock investors.
  • The best stocks last year: infant formula, AI, lithium. It’s all about the changing of the Chinese economy.
  • The carillion contagion. Second biggest builder in UK goes under, is this a one-off or the start of something broader?
  • Amazon has helped drive Kogan’s stock price up rapidly, so will Kogan buy Myer?


Hello, I am James Kirby, Wealth Editor at The Australian.

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

And we are…

The Money Café.

And indeed, it’s the first Money Café of the year, so welcome everybody to Money Café in 2018, our second year, Alan, on the road with Money Café and our first week out.  Here we are in our favourite café in Melbourne, in Southbank Melbourne, and don’t you know it’s about 40 degrees outside today.

I know, and speaking personally I’m not drinking coffee I’m drinking soft drink, and it’s cold.

Yes, iced coffee I should have ordered but there you are, that’s Melbourne for you.  It’ll probably be 21 degrees when we record next week.

They’ve probably got cold dripped coffee here, you know James, have you had cold drip coffee?

I’ve had it, yes.  Next time, next time, Alan.  Now, let’s get down to business because I suppose there are so many things to talk about but the outstanding issue, as always over the last few months, is the market and also Bitcoin and the two things really running in parallel.  But, what’s really interesting this time around, and I think it’s our BT Mega Trend automatically walks in here, central stage, because Bitcoin 2018 what’s going to happen really is an amazing subject.  What’s happened since Christmas at least, since we talked last, Alan, is that Bitcoin has fallen 50% from its top to its current level which is just starting to firm up actually, improving overnight.  But, 50% from top to bottom.

Hardly anything, really.  I mean, Bitcoin is up and down. 

But it’s 50% though.

There have been half a dozen 50% falls in Bitcoin in its lifetime and it just happens that this one came from 20,000 down to 15,000 – no, in fact it wasn’t quite…

It was 19 or something wasn’t it?

19 and then it’s got down to below 10,000.

Yeah, scratching 10.  Do you think that it means anything then?

I think it’s a pretty choppy market, Bitcoins, and a lot of people say here’s the crash finally but I don’t think it is the crash, I’d say it’s probably going to recover again but bubbles tend to go on far longer than you ever think they will.  It is clearly a bubble, I’d be amazed if it’s over.

Yeah, what I wonder is we talk about how it will end.  I mean, can the investment markets keep going up in the way they are – we’re in a really good market right now, the ASX is good and of course Wall Street is twice as good, three times as good, but can the markets go up and Bitcoin go down?

Of course.  I saw Kerr Nielson of Platinum came out the other day and said if there’s a Bitcoin crash it’ll affect everything else.

I saw that, I think he’s dead right.

Yeah, probably.  I mean the only thing I’d say about that is that it’ll affect everything else to the extent that people have borrowed money to buy cryptocurrencies because if they have they’ll go broke.

But also, the scale of it too.  I mean that was very interesting to hear Kerr Nielson, and I was glad someone like him actually did opine, not a central banker, not an economist but someone who’s got a track record of managing money and he said – that’s right, he said if there’s debt behind it, it could affect all equity classes.  That’s what I’m saying, can we have a controlled collapse in Bitcoin and it not affect the market?

But, bear in mind that if all cryptocurrencies, including Bitcoin, went to zero that would be equivalent to a 2% fall in the S&P 500.

Yeah.

I mean it’s not much, it’s not a big market, right.  The other thing is that’s if it went to zero, it’s not going to go to zero.

But it could go pretty close to zero.

It could, yeah, but I mean the thing is that this stuff is here to stay.  The other thing to bear in mind about it, which I’ve been thinking about it over the holidays, is that none of these things – so, what you have is a new industry, basically, which is blockchain.  You have a new blockchain industry which is coming up so in many ways it’s equivalent to or similar to the beginnings of the internet in 1990.

There are strong parallels.

There are.  The way to invest in the internet in the 90s was to buy internet companies listed on NASDAQ, right, and so NASDAQ went to 5,000 famously and had a bubble.  But, none of the blockchain companies, or not many of them, are listed.  The only way to invest in the blockchain revolution is to buy cryptocurrencies.

It’s the primary way in, yeah.

People are using cryptocurrency purchases as a proxy way in a sense or a way to invest in what they can see is a big change to the world through blockchain.  Now, I mean many of them are valid investments in some ways but many of them are not.  For example, a lot of them, including Bitcoin, are means of ways of transferring money.  Ripple, Bitcoin Cash, Bitcoin, Ethereum, they’re all money transfer systems and really there aren’t going to be that many of them.  They’re all jostling for position trying to become the new money transfer system and Bitcoin is under challenge from Ripple and so on.

It is and its market share is fading but it remains the biggest by some degree.

It remains the biggest but they’re all kind of going after it but they’re not all going to be – there might be two or three surviving.  Then of the other 1,400 cryptocurrencies a lot of them are tokens of a way to, in a sense, invest in a particular business.

Yeah, that’s right.  My personal favourite is Dentacoin.

Dentacoin?

Yeah, which is for dentists only.

There you are.  So, those coins have some kind of value which you can turn into a filling in your tooth I guess, I presume, I don’t know much about that one but – so, look, I think it’s interesting, I don’t think – I think it’s a bubble but I don’t think it’s going to go zero and I think it’s probably going to last longer than you think.

Yeah, but one of the things about exactly what you’re talking about, that idea that it’s hard to get in or if you don’t want to buy Bitcoin itself, and I wouldn’t blame someone for not wanting to buy Bitcoin because it is utterly speculative, there’s no way of appraising the value and you know it’s a bubble – we all know it’s a bubble so it’s a question of going for the ride.  Some people of course will come in another door and they’ll go in on the ASX.  Just looking at crypto related small caps on the ASX and it’s interesting because just like…

How many are there?

Maybe there’s a dozen and they’re not well known at all.

But, how related are they to Bitcoin?

They’re related only in the way that they have services in some fashion that are patched into the business.  The big one is called Digital X, that’s got a 182 million market cap.

And they’re selling the picks and shovels for the gold rush.

They’re selling the picks and shovels, yeah, exactly.  You know, in a way the telcos were selling the picks and shovels in the dotcom boom and if you remember the big telcos around the world they really fired hard, including Telstra, they all ran hard in the dotcom boom because they were seen as the picks and shovels of the internet.  I think in a similar fashion people will probably start to invest and there’s probably money to be made in companies that can service this boom without actually being integral to it.  Digital X is one, I just mentioned that, the other thing that’s interesting is they are very tied to Bitcoin so in a way when Bitcoin fell they fell, not as much but they generally tripled – some of these small caps on the ASX have tripled up to January and then they’ve fallen 20%-30% in the last few days as Bitcoin tumbled 50%.  So, now on the issue of how does mum and dad get into this area we have a good question this week, Alan, I’m just going to find it here.  It’s from Zero Knowledge, that’s a handle of someone on Twitter, and the question is…

It could be his name, Mr Zero Knowledge, what do you think?

It could be, Mr Knowledge is a great name, great by-line if he ever goes into media.

Yes.  Well, g’day, Zero, how are you going?

How are you, Zero?  Here’s the question; are we going to see a mainstream Bitcoin fund in Australia soon?  Now, that’s a good question, isn’t it, because there are funds in the US.

There are and I, in fact, interviewed one just this week, Zero Knowledge.  A bloke who is starting up a fund called XBT Investments, he’s out there raising money at the moment.  It’ll be a listed investment company.

Okay, so not an ETF?

No, and it’s only going to invest in Bitcoin futures on the Chicago Board of Trade.  So, because ASX listed investment companies are not allowed to invest in Bitcoin but they are allowed to invest in derivatives, so he’s setting up a fund.  He’s trying to raise $30 million and he hasn’t yet got final approval from the ASX.

But, has he raised $30 million then? 

No, he hasn’t even gone out for it yet.

Or he can’t raise it until he gets approval, is that right?

He intends to, that’s right.

Did he give any sense that he could or any indications or…?

He’ll do it, no worries.

You’ve got too think he’ll do it, you’ve got to think somebody could do it, raise the fund for Bitcoin.

Sure, he’ll do it.

I mean there’s a demand there.

Yeah, no problem, and that’s the first thing.  What he’s done is he started sort of a Bitcoin investment management business called Bit Funds in Perth which is where all the best entrepreneurs operate, of course.

I have no idea what you mean by that, I think you’re saying that tongue in cheek.

St George’s Terrace, mate, it’s where it’s all happening.

I thought he might have been in up in the Gold Coast but there you are.

There he is.  He’s got this thing called Bit Funds, his first fund is called XBT investments which will be out there soon and then he’s going to follow that with another one that will invest in other cryptocurrencies other than Bitcoin where he’ll invest directly in those other cryptocurrencies, for which reason it won’t be on the ASX because the ASX won’t let him.  He’ll be on the National Stock Exchange, the NSX, which does exist, it’s another stock exchange which has slightly looser – if I can put it that way – listing rules which will allow this.  So, there it is.

You know, a few companies have actually come through that exchange, it does exist, it’s perfectly legit, if tiny.

So, Zero Knowledge can no longer be called Zero Knowledge because he now has slightly more than zero knowledge, we’ve given him some.

But, what’s the name of that fund again so people can…

XBT Investments, just keep an eye out for that one if you’re interested in that.

Okay, and that will be on the ASX.

And caveat emptor everybody.

Caveat emptor to this entire program really isn’t it, Alan, not just our issue on Bitcoin, no.

So, what’s the Latin for ‘listener beware’?

Yes, indeed.  I don’t know, maybe somebody will send that into us in our questions next week.

Do you want to ask another question or were you going to go…

Yes, and we have a junior has just entered the café in a pram and we might be regularly interrupted, we’ll see how we go.

We have a tantrum.

God.  Well, you know, it’s live folks, we’re not kidding, you see, we’ve got to flow on.  Okay, now Alan, the other big story, the monster story really which outshines Bitcoin for all its entertainment aspect…

Which is what?

Is the market, the share market going absolutely flying, not just on the ASX but particularly in the US where it’s just basically run…

I think that child is an investor in the Australian market and wishing he was in the US market because that has been the place to be, has it not James, over the past couple of weeks?

I know, again and again it runs faster than us, it runs higher, and then when it falls we’re quite happy to fall with it which is always infuriating and one of the reasons, I suppose, that we continually suggest to people that they diversify their portfolios and get into overseas markets.

Well, it’s all because of the tax cut.  They’re going to cut the taxes, they’ve finally agreed to cut the tax from 35% to 21%.

And tax cuts are the real thing, I mean they change the numbers on your investments.

That’s right.

So, it’s for real and it’s amazing just the speed at which it’s ploughing into American figures and American stock markets.  It’s probably a little bit scary how fast it’s gone up I think the last few days, touching 26,000 now.

Yeah, so the difference between the Australian and the US stock markets is the fact that the conservatives control both houses in the US and they don’t do so here because the Coalition’s tax cut proposal, such as it is, is blocked in the senate whereas the one in the US is not blocked in the senate.

No, and theirs was – actually it’s extraordinary how quickly they managed to do it when you think of our version of the tax cuts.

Well, which is still going nowhere.

And how elongated the plan is and how elongated the process is to get it through the senate.

Yeah.

But nonetheless I think it’s going to be a good year for stock investors, I saw where – very interesting, Investment Trends, they’re very good, it’s a global thing, they do a survey every year and they’ve been doing it for about 15 years.  This year it just showed that the majority of recent investors in Australia – last year they thought that the market would do 2% to 5% and in fact it did 15% if you put in dividends of about 4% and a return of about 11%.  We’re talking 15% on the ASX last year so I do think, and all these surveys show, that people will be coming back to the stock market this year.  I think you’ll see retail investors really coming in.  Now, the issue is how do they do it and one of the outcomes of this survey, this investment trends survey that I thought was interesting was they’re still slow to buy shares individually.  They’re going into managed funds, believe it or not, which is amazing, actively managed funds.

Why is that amazing?

Because they’ve had such bad press for so long and they’re going into ETFs but they’re slow to go into individual shares.  But, you’ve got to think as long as the US keeps acting like a locomotive like it is our ASX is going to be pretty good this year too.

Until the US market goes down.

Until the US market goes down, and that’s why we’ve got to watch it so closely, every day you’ve got to watch it because it is very much – has always been the driver.

And every day we have to read The Australian’s wealth section.

We do.

And not to mention The Constant Investor, every day.

Every day, it’s the only way, Alan.

Otherwise where would you be?

It’s the only way to keep up.  Now, I do think this is going to be a good year and for instance wouldn’t you just love to have been someone plucky enough to go back into those infant milk companies a few years ago.

Well, you mentioned the stock market is going to be good this year, if you’re a Bellamy’s investor you’d be all done and dusted for the year.  I think it’s gone up 30% in a couple of days.

And that’s got a new management now, they’ve got a new CEO and all that.

Yeah, that’s right, and they’ve got their Chinese approvals back and the stock is back above where it was before it crashed last year.

Well, look, that’s all very impressive and A2 Milk, that was the single best stock on the market last year.

In the XJO, in the ASX 200 index.

ASX 200, yeah.

On the whole market it wasn’t the best performing stock.

No, what was the best in the whole market?  He says, question without…

Well, you should ask that question, and it’s very interesting because if you have, as I have, a list of every stock in the market which is 2,300 of them the best performing stock on the market was a thing called Bubs.

Bubs?

Bubs.

Yeah, tell us more.

And guess what it does?

Gosh, infant milk?

Sells infant formula to China, it does.  It’s a little Sydney business that does that, so how about that?

Well, it must have had a market cap of about 50 cents.

And the other stocks, and I wrote this in a column for The Australian, the other stocks that did well – there was Bubs, there was MyFiziq which is an artificial intelligence thing for your phone about getting fit.  There’s a lithium company called AVZ Minerals which has a lithium deposit in, of all places, the bloody Congo.

There’s a few of them, actually yes, we’ve got a question on that in a second.  So, lithium, fitness and infant milk.  I have to say the infant milk is the most fragile delicate precarious investment, I think, because it’s totally exposed to Chinese rules and Chinese rules are, at the very best, oblique.

Well, if I can gently disagree.

Disagree?

No, but what it’s all about is the changing of the Chinese economy from industrial to consumer, right, and so it’s the growing wealth of the Chinese consumers and the ‘middleclass-isation’, if I can put it that way, of the Chinese economy.

But, how can you be confident that the Chinese don’t play with the rules, change the rules.

Well you can’t, exactly, that’s right, it’s fragile.

And that’s just on the bureaucracy.  There’s also just the genuine chance that something could go wrong.  I mean the slightest poisoning of anything and…

But that’s why they’re buying Australian infant formula because the Chinese one poisoned everybody and so the Australian infant formula has got a pretty good name.

It has, but it hasn’t got a perfect name, they had a couple of incidents last year.  There was a couple of facilities that were checked by China, though, as to what actually happened there I’m not sure.

Well, maybe they’ll start breastfeeding and that’d be a disaster, wouldn’t it?  Heavens above.

Maybe they’ll return to that and then they won’t have to buy the formula, and then we wouldn’t have stocks that are flying off the racks.

Hey, we have another question, this one is for you, James.  From James Rowan on Twitter, it’s a good Irish name I guess.

Well, Rowan certainly is, yes.

So is James.

James is common, common around Ireland though not necessarily Gaelic.

Is Carillion contagious?  Now it sounds like a disease.

We have to explain what Carillion is.  Carillion is the second biggest builder in the UK, which is a big call, and it’s gone under.

Yeah.

Yeah, spectacular.

So, is it contagious?

I wouldn’t think so, no, I wouldn’t think so.  We’re getting some big crashes overseas in individual situations.  Carillion is really spectacular.  As I say, the second biggest builder in England.

I think KPMG is in a bit of trouble because it gave it a clean bill of health as the auditor not long ago.

That’s interesting.

And I think questions are being asked in the house.

They are, and the auditors are also in trouble in South Africa where they were also signing off companies, the big one there is called Steinhoff.  Now, Steinhoff has got a bit of interest to us because not just that it’s a gigantic company that’s in trouble, hasn’t collapsed just to make that clear, it’s in deep trouble but it’s still alive.  But, what’s interesting for Australian people is that it employs 10,000 people here, Steinhoff.  Now, no one knows the name, Steinhoff, but they know that…

What do they do with these 10,000 people?

Fantastic Furniture is one of theirs, Freedom Furniture is one of theirs, Harris Scarf is one of theirs, they have a whole string of retail operations.

I wondered who owned Freedom Furniture, there you go.

So, there you are.  Well, it’s the Asian subsidiary…

They’ve gone bust too?

No, they’re hanging by a thread basically, the parent, which is a South African listed company in Johannesburg but they reckon they’re going to have to sell some assets, probably some Australian ones.  It’s interesting because it’s retail.  Before Christmas the big fear was if there was going to be a company that’s going to let us all down, I’m going to get up in the morning and have a big drama in Australia, it’s going to be in retail.  Well, it hasn’t happened yet but Carillion and Steinhoff especially giving us some suggestions what might happen.  Retail, when you talk about Myer – you mentioned something very interesting earlier about Kogan is now bigger than Myer.

Yeah, on the stock market, its stock market value, Kogan, is $650 million of which Ruslan Kogan owns 51% if you don’t mind, so he’s a very rich person and Myer’s market value is $530 million.  So, when I interviewed Ruslan today for The Constant Investor one of my questions was when are you going to buy Myer because…

And he said when Solomon Lew gets out of the way.  He bought Dick Smith, right, he bought Dick Smith brand not the stores, clever.

The brands.  But, the point is that Amazon bought Whole Foods Markets so it owns a chain of physical stores even though it’s an online retailer and I’m wondering whether Kogan will do that.

Did you ask him – what did he say first of all?

He said well one thing I’ve learnt in this business, Alan, is to never say never.

Alright, okay, that’s exactly what I was going to ask you next, did he rule it out, so he didn’t rule it out.

Well, he kind of laughed.

You could see him picking up the brand name just like he picked up Dick Smith.

But you know that Kogan’s share price has doubled since Amazon started in Australia back in December.

Yeah, very impressive.

It’s gone from $3.50 to $7.

Why is that?

Well, because it’s all about the growth in the category and so here’s some stats, right, this is from Ruslan.  I haven’t checked the numbers but he says the proportion of retail sales in Australia online is 7%.

It’s very low by global standards.

And so the total is about $20 billion or so in sales of which Kogan’s sales are $300 million, whereas the total category of online retail is growing at 11% per annum, which is still quite a lot – much more than the growth of retail sales generally which is 3% to 4%, online growing at 11%, Kogan’s sales are growing at 30% compound.

Right.

His market share is growing but the other thing is that $300 million out of $20 billion, it’s still tiny.

A long way to go.

He’s got a long way to go and so that’s what’s going on.  I mean everyone is going well with Amazon here the number of people who buy online is going to grow rapidly now and Kogan and the other online sellers are going to benefit from that.

And it looks like Kogan is the one that’s picked up on that trend, that’s a trend for the year.

The one that keeps pestering me is Peter’s of Kensington, goodness gracious, I mean they are…

Personally or professionally?

With e-mails, spam, I mean they’re not listed so…

They leave me alone I’m happy to say.  We’ll have one last question before we wrap up.  It’s a pretty interesting question from Daniel.  He says how are we going to deal with the excise tax problem once electric cars become dominant?  That’s a very good question, Daniel, I see 38 cents in the litre at the bowser still goes in excise tax.  But, if there was no petrol and it was all electric cars there goes that tax revenue.  Interesting one, Alan, have you seen anything on that?

Yeah, there was a piece on 7:30 or something the other night about it and one of the – that’s right, it was Paul Fletcher, former journo, now minister for urban infrastructure, and he was coming out saying we’ve got a problem because…

Yes, a looming problem.

Anyway, they’ll find something.

They will, but I suppose that’s one thing at the moment, if you have an electric car, you get one, it’s an early reward, isn’t it, that you don’t actually have an exposure to excise tax once you get it on the road.  Okay, well look I think we’d better leave it there for today, Alan.  It’s great to be back, it’s great to be back in 2018, do send us some questions, great to have some questions this week, and don’t forget…

You can put questions onto Twitter if you want to.

You can put them on Twitter or send them into us or get them to us in any fashion you can.

Hey, what’s our handle, what’s our Twitter handle?  It’s @AlanKohler or you’re @KirbyJourno.

I am, Kirby_Journo@…

No, it’s not @ anything, it’s @Kirby_…

This isn’t fair, I haven’t got anything written in front of me, I can’t recall.

It’s @Kirby_Journo, that’s what it is.

Thank you, that’s very impressive to remember my Twitter handle.

How did you come up with a stupid handle like that anyway?

A long story but my son was about eight at the time and he came up with it, and I couldn’t say no.  That’s why I have Kirby_Journo.  There you are, straps me into journalism for the rest of my life.  Okay, now finally, folks, to keep track you can subscribe to the money café on Apple Podcasts or your app of choice and while you’re there it’s very helpful if you could leave a review or a rating.  We’ve got some fabulous reviews, you should read them, they’re really impressive.  But, it also helps listeners to find the show.  So, send in the question and we’ll answer it on our next week’s episode.  Until then, I’m James Kirby, Wealth Editor at The Australian.

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

Thank you.