Barnaby Joyce’s new financial reality. Will Myer Go Broke? Betting on a belter of a bank inquiry.

This week James Kirby and I discuss the following topics:
  • Why Barnaby Joyce is cornered, financially.
  • Banking royal commission – the first thing any respectable commissioner does is beat everyone up: tick!
  • Can bitcoin survive independent of the markets? 
  • Much ado about ETFs.
  • Alan thinks there’s a fair chance Myer goes broke!
  • The superstar stock that’s rolling along while others stumble .
  • How do you hijack an ASX-listed company?
 


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

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

And we are The Money Café.

The Money Café.

And what a week it is, Alan, gee it’s a newsy week, isn’t it?  We are well and truly up and running.

And 50 episodes.

50 episodes, this is the 50th folks, we have the half century on the board and…

This is we raise our bet a little bit, we point it at the…

Don’t get carried away.

That’s right, we point it at the dressing room, in our case it’s Eric, we point it at Eric.

We point it at Eric, our producer, and we say thanks for all your help so far, Eric, and also to Greg, we have alternating producers actually, folks, because as you know The Money Café is a joint venture between The Australian and The Constant Investor, Alan’s Constant Investor website.  Now, this week let’s start at the beginning, Alan, and really the story that runs across every section of the newspaper.

And I think you caused a bit of a flurry at The Australian as the Wealth Editor of The Australian writing about Barnaby Joyce.

Yes, I did.  I didn’t necessarily mean to cause a flurry.

And they sent it straight off to the lawyers.

They did, and the lawyers sent it back and said you’re fine, James, off you go.  Funnily enough last weekend I had a piece on child maintenance that was a standard four by nine piece that was read by a conventional number of people and then I basically reprised some of the key observations in that yesterday but I also, if you like, transposed it onto the Barnaby Joyce story and it went a lot higher in traffic than usual.  So, you see the thing with Barnaby Joyce is that he’s cornered, really, financially.  If he stays with his new partner he faces child maintenance with his family and if he goes back to his family he will face child maintenance with his partner straight up, and property settlements both sides as well, either or.  So, I think financially he’s in quite a crunch.  He was the second highest paid politician in parliament.

So, what are you saying, never get your mistress pregnant?

Yes, financially I wouldn’t recommend that at all.  So, nothing to do with the morals of it all but financially it is desperate.

I chatted to Miranda Devine this morning who is the columnist for The Daily Telegraph and The Herald Sun and she is quite well informed on these matters because she knows them apparently.  I spoke to her before Barnaby actually went off on a leave of absence, or at least announced it.  She said she didn’t think he was going to go, that she thought he’d survive.

Well, she’s wrong.  Well, not that she’s wrong but he has just announced, and I mean just a few minutes ago, announced he’s taking a leave of absence.

Which he may or may not come back from I guess.

I suppose so.  Yes, it will be interesting to see.

I reckon just to conclude this off-topic subject I reckon it would be great for the Turnbull government if he did go entirely. 

You think so, yeah.

I mean, Miranda was singing his praises as a fantastic politician and all that stuff, I think that’s rubbish, I think he is not a very good politician and he’s been a liability to the Turnbull government from the start.

I have never really paid much attention to him until this affair but one of the other things I thought was really interesting, Rick Morton’s story in The Australian that Barnaby Joyce was living in a rent-free apartment in the town of Armidale provided to him by a local businessman called Greg Maguire.  Most people don’t have that sort of facility and if that sort of thing is happening, if politicians are living in homes provided free by businessmen, we’re entitled to know.

You bet, and I reckon they shouldn’t do it.

No, I don’t think they should do it either, when they’re in office especially and when they’re on $400,000 a year as he was provided by the taxpayer except for a few weeks when his citizenship was unclear.  Now, back in the real world, Alan, we’ll take a look at some of the things that have been happening this week.  The big thing I suppose was the official kick off, if you like, of the Royal Commission into banks.  Have you had a look at that, any observations?

Yes, so we’re going to call this our BT Mega Trend, are we not?

I think so, yeah, because of the whole worldwide – not backlash but sort of intense policing that we have of banks now, not just by regulators but by the whole jurisdiction, if you like, of banking around the world.  It’s really going to pinch how banks behave but it might pinch what their returns are.  I think this is our Mega Trend moment which we should mention is of course sponsored by BT Financial.

Yes indeed.  So, I thought it was quite a novel and interesting kick off to the Royal Commission because his honour, the Royal Commissioner Ken Hayne, had the first day I think it was Monday and he revealed on that day that on December the 15th, the day after he’d been appointed – and the Royal Commission it should be remembered is into misconduct in the banking financial services and superannuation, right.   So he said on December the 15th he wrote to all the banks and superannuation funds, and everyone, asking them to set out their misconduct, to write down their misconduct in 50 pages or less.  So, they all did, they all did it, but then he’s whacked them around the ears on Monday because some of them didn’t do what he wanted, he wanted them to not only list their misconduct which presumably saves him a bit of trouble finding it out, he’s just asked them to fess up about it, but also to go into the impact of it which some of them didn’t do.

That’s what he was complaining about?

Yeah.

I thought they were late.  Okay.

Some of them listed it and then so he’s gone back and said no, you’ve got to go into some more detail, I want more detail, not just what you did but how bad it was and all that stuff.  They’ve come back and said we haven’t got time now, you’ve got to give us more time and he’s given them another whack, he told them to bend over, because you can’t possibly have that.  That was quite an interesting start to the whole thing.

Yeah, and so was the thing that if you remember at Christmas there was this whole debate, should superannuation be included.  As I remember we both said of course it should be included but it turns out one of the first things he’s pointed out is that superannuation is the area where there’s more complaints than anything else.

Yes, but half the complaints that have come in so far are to do with banking, presumably to do with the wealth management arm of the banks as opposed to superannuation funds separately.

Yes, and also that if you went into a bank and asked for a financial product, for financial advice to get a financial product to get you on your way, eight times out of ten you got the bank that you went into.

Of course.

Well I hadn’t actually seen it in black and white before.

Yeah, well that’s the whole purpose of them owning the superannuation funds.  This is the whole problem with the whole thing, this is what he needs to investigate.  The first thing any Royal Commissioner, self-respecting Royal Commissioner, does is to beat everyone up to make it clear that he’s not anyone’s patsy.  So, he’s done that this week.

Tick.  Let’s see what he does, I’d be interested to see if he really makes a change to the culture of the banks.

Now the other thing is that you’ve been writing about Bitcoin.

Yeah, Bitcoin.

But you haven’t been complimentary.  I can’t understand that, James.

Well, you and I were talking about could Bitcoin go on a separate track to the markets, in other words was Bitcoin non-correlated and could Bitcoin go up for instance regardless of what the markets were doing.  So, there was always this question is it correlated or not, in other words can it act like gold and if the markets fell would it act like gold, by that I mean that it might go up or be stable while the markets are going down.  So, the first big test…

I presume you’ve had a Royal Commission into this have you?

I have had a personal commission into this and it turns out that, guess what?  Bitcoin is no good as a standby.

But it’s entirely uncorrelated because Bitcoin has been falling since December and the market has been going up until two weeks ago.

Yeah, but during the course of the correction it fell approximately 20% and gold was virtually steady.  So, there’s now some work out of the US showing that there’s a 33% correlation or so with stocks.  So, all I’m, saying is, folks, if you’re thinking about a store of value should the markets get rocky again, and they will of course sooner or later, I wouldn’t be thinking of Bitcoin.

No, think of cars.

Think of gold.

Good cars.

You mean rare cars, you mean vintage cars?

Yes, of course.

I don’t know about that.  That was good for a while.

Buy an old Ferrari, it will cost you $20 million.

I don’t know if that’s as good as it used to be, it was good for a while.  The other thing that we were talking about of late that we seem to be going separate ways on is ETFs because you were calling them evil there last weekend.

No.

You did.

No, you’re misquoting me, James, I deny it.

Are you going to say I didn’t write the headline?

No, I did write the headline and the headline said the evils of indexes not ETFs.

Alright, okay.

But I don’t like ETFs, it’s true.

But the tenor of the piece was negative, would you say, about ETFs?

Yeah, it was extremely negative and I said that Charles Dow and Eddie Jones have a lot to answer for, who invented indexes, because – and it needs to be remembered as I wrote in the piece, that Charles Dow was the Editor of the Wall Street Journal and he invented the indexes in order to come up with stories for his newspaper, that was all.

Sure, and all very interesting.

And the only reason for the existence of indexes, up until they’d invented ETFs for people who invest in indexes, was to generate stories for newspapers because otherwise the stock exchange goes on its merry way, people buy and sell shares, some go up and some go down, right.  The question of what they do on average is irrelevant to anything.

Hold on though because it’s really valid here, 5% of the Australian market is in ETFs, 30% of the US is in ETFs.  30% of the entire market in the US is ETFs and we’re going that way.

Well, that’s absolutely shocking.

Well, I don’t think it’s shocking because I truly believe it’s the least worst option for most people, people who know nothing about the stock market they can go in, they can buy an ETF on the ASX and they can actually set and forget, which you can do with very little anymore, and they won’t get creamed like they might in other areas.

Well, they might get creamed but just they won’t get creamed any worse than the market.

And that’s not bad.

That’s the thing, if all you care about is your relative performance, that is to say you don’t want to do any worse than the market…

But you’re presuming people can go in and investigate stocks, and there was always this thing with financial commentators where they’d say to people on radio or whatever, well if you think BHP is good value at the moment and the truth is most people haven’t a clue if it’s good value or not.  For those people I think ETFs are very useful.  I’m not saying they’re good for the market which was the point you were making but on an individual basis they’re good enough.

Well, I’m saying that the people who invest in ETFs are putting half their money into banks and big miners, right, and because that’s the way the index is structured, that’s the market.  So, I suppose I have a different view about that index, the ASX 200 index or the all ordinaries index, or whatever it is, ETF, that ETF and a sector ETF.

Yeah.

Because I quite like, for example, the robotic ETF that BetaShares puts out and speaking of gold there’s a whole lot of, or there’s a few gold ETFs.

Gold or maybe emerging markets where you have select opportunities, yeah.

I do think that it’s a good way to invest in a theme if you like a theme, whatever it might be.  You might like retailing or you might think of artificial intelligence and I think that’s a good way to invest in those things because in particular with foreign companies, global businesses in those industries, it is very difficult for people to figure out which company is which but an ETF is fine.  But an ASX 200 ETF, forget it.

Well, I disagree, totally disagree, got to say.  The other thing is you think about the market, one of the things that retail investors get caught on – because we’re doing it every day we stay abreast of all this but most people don’t.  So, when you look at the market 20 years ago all the big companies, BTR Nylex, CRA, Pacific Dunlop, they’re all gone.  The big companies today will probably be gone in ten years’ time and a lot of people don’t watch that, can’t be on top of that.  But, an ETF does keep it up for you.

I’m saying if you don’t want to do any work for your investing that’s fine, don’t do any work, give your money to a fund manager, give it to a super fund.

No, don’t give it to a fund manager who goes off and actually spends time and your money doing the index anyway, or maybe worse than the index.

No.  Well don’t give to an index fund manager, obviously that’s pointless.

No, I said there’s so many fund managers are not good enough, I’m protecting people from that option.

I accept that it’s difficult to know which fund manager is which, which is why in The Constant Investor I spend a lot of time interviewing fund managers and grilling them about what they’re doing, and how they go about it and what they’re investing in.  So, for example last week I interviewed Australia’s top performing fund manager, Mark East, of Bennelong Concentrated Equities.

For what period, was that last year?

Top performing for last year.  So, his performance last year was 28% after fees, 31% before fees, and that was considerably better than the ASX 200.

But, the killer is that history would suggest he won’t be the top performing manager next year.

Well, he’s been among the top performing for 10 years.

He may be among them, yeah.

All I’m saying is that if you find somebody who’s a good stock picker and has had a good performance for 5 or 10 years then they are likely to continue to be a good stock picker.  They don’t lose their ability.  It is true that past performance is not a guide to future performance.

Okay, I would add a caveat to that though, the ordinary investor can’t keep track of the guys who are going in and out of these funds and they get poached and they go off and they start their own funds, and you can’t keep track of that.  So, again that’s an argument for ETFs.  I really think ETFs have a lot going for them.

Okay.

Will we talk about individual stocks now that we’ve been talking about ETFs?

Let’s talk about Myer then shall we, what do you think about Myer?  Poor old Richard Umbers has been booted out.

Yes.  Here’s the question; will Solomon Lew get Myer?  That’s the question really, isn’t it?  And if he gets it will he pay a proper price for it.

Well, I’ve known Solomon Lew on and off for decades and I don’t think he’s an idiot really.

But, he sunk $100 million into Myer, I know he’s not an idiot but it probably is the biggest mistake he’s publicly made, would you say?

He is an idiot, let’s face it, he’s done all this.

Would you say that was the biggest public mistake he’s made?

He used to always say I’m Soli not silly.

Well, he might get it back and of course he’s a major supplier to them but he put 100 million into Myer and Myer is now worth about 350 million, so will he get his money back?  Maybe that’s a better question.

No, he won’t.

You don’t think so, ever?

No, I think there’s a fair chance that Myer goes broke.  Morningstar’s analyst put out a note the other day saying that they think Myer will survive.  What?  You, don’t want to hear that.

So, the question is will it survive or not, yeah.

You don’t want to hear analysts coming out and saying they think you’ll survive, goodness gracious, that’s terrible.

There was a very good piece of research recently where someone made the point that they can’t do the write offs like David Jones, they can’t do it because they’ll hit the debt covenants, so they’re really in a spot.

Well, there you are.  They’re talking about getting Paul Zara back, Paul Zara was the CEO of David Jones.

Well, there is talk, yes.  Do you have any idea what he’s been doing?

Yeah, he’s been a retail consultant.

I see.

He stayed in the business but helping others.  He’s a smart guy, Paul.

He was very popular, wasn’t he?  If he was so popular how come he lost the top job?

I’m just trying to remember now.

Was it because the South Africans came in, was that it?

Paul got a bit butchered, I think it was…

He had a debate with the Chairman, he ran in with the Chairman.

Yeah, there was politics.

And there was fund managers boosting the Chairman and there was fund managers boosting Paul Zara.

Yeah.

Yeah, actually one thing he’s been doing also, going way off the track here, folks, but he is the Chairman of Nexba, which is the no-sugar drinks company.

He is, exactly, that’s right, well remembered.

Yeah, which is taking on the Coca Colas of this world who are of course really struggling.

That’s right.  We’ve got some questions, shall we go through those?

Yeah, okay.  Just before we do, just before we start the questions I also thought it was worth mentioning that though the correction is still perhaps not quite over some very good results this week, some really good ones, and those companies that were coming out with good results were able to put on 3%, 4%, 5% even though the market has been flat.  IAG, outstanding, Suncorp doing very badly, QBE doing dreadfully, and IAG really starting to cruise.  CSL doing very well as well.

What a ripper CSL is.

I know, I wish I’d bought it so long ago.

Well, I reckon a whole lot of people would have sold CSL when McNamee left and that would have been a big mistake.

Yes.

If anything it’s done better after he left than it did when he was there.

So, this is Paul Perreault, he is very impressive and he’s very solid.  It’s a very rare story, isn’t it, that a superstar stock keeps going.

I know, it’s $150 now or something.

And it’s $150, that’s what it is, yeah, there you go, and a PE of 40 I think folks, you could have picked it up on a PE of 38 if you call that a bargain last week.  Okay, what’s our questions?

Okay, Andrew says as I lie in bed listening to Money Café being too heavy…

Being too heavily invested.

Come on Andrew, it’s time to get up, out you get – being too heavily invested in the ASX I am becoming very jittery about the US 10-year bond rate.  Do you two guys think there is any chance of the 10-year bond rate going to 4% and what would a 4% risk-free rate do to the ASX and gold?  Are we in danger of all these articles about rates resulting in a self-fulfilling prophecy?  Well, it’s already had a self-fulfilling prophecy which is that everyone is interested in the ten-year bond rate now which is interesting.  No one ever heard of it before.

No, but of course it could go to 4% if I can jump the gun there, Alan.

Yes, you can indeed.

Of course, it can, yeah, and I presume it has been 4% in the past.

The next question is, James, what does that do to the ASX and to gold?

Yeah, well the ASX would want to be doing really well to fight against it I suppose, on earnings.

That’s it.

Simple answer, yeah.  Gold, you’ve got to think gold is going to be a good fall back, at least an insurance policy from here on in.  We know we’re in the late stages of a bull market, we know bond yields are rising, question is about the US Dollar.  The US Dollar is dropping as well so it’s all kind of good for gold, isn’t it?

Yeah.

Traditionally.

I think so.  The question of self-fulfilling, all of us journalists love to think that our articles result in self-fulfilling prophecies but in fact unfortunately not the case, Andrew, nobody pays any attention to us at all.

Yes, they do, it can be measured these days which is marvellous, you can see how many people are reading you or indeed commenting on you which we used not be able to do.  Question from Stephen.  I am sorry, Alan, I’ve read this question in advance and I can’t really – I’m struggling to – I think it’s about you but it certainly isn’t me.

So, it’s not you.  So, anyway I rang him up, our man.

Which man?

That fellow with the question.

Stephen, sorry.

He owns a wallpaper company.

Okay, well tell them what the question is first of all.

The question is one or both of you sung the praises of Australia Post Star Trak in recent years, relationships with small or medium companies have turned to custard, where once we were fierce about the service we now are looking for alternatives.  I’d be interested to know how the new chief deals with all this.  So, I rang our man up and said what’s been going on, what happened.  So he told me at great length.  It was a lovely conversation, he’s a terrific guy and he’s got a wallpaper business.  Then I rang up Australia Post and told them about this guy and what have they got to say for themselves.  They said put him in touch with us and we’ll look after him.

Okay, but you’ve got to follow up on that one now and see do they look after him.

Well, I’m sure, Stephen, you’ll need to tell us what’s happened because we don’t just answer questions, everybody, we solve your problems.

We’re a full service.

We’re the full service, we solve your problems.  So, he’s sorted.

Well, maybe Stephen will tell us in a month or two whether he really got sorted or not or whether it was a quick PR move by Aus Post.

Here’s a question from Loki on Twitter.  How would myself and associated parties take over an ASX listed company and change it to what we wanted it to do without listing our own?

Isn’t that good.

That’s interesting.

He wants to take over a company without listing.

Yeah, that’s called a backdoor listing.

Backdoor listing.  I know what he should do, Loki, you should go on a plane to West Perth where they’re experts on this in the mining game.  There’s a couple of streets there in West Perth and that’s all they do all day long, they run around taking each other over and picking up what they used to call dormant listings.  So, what happens is you get a company that’s half-dead that everyone’s forgotten about but hasn’t de-listed and you move in and you buy it for whatever, half a million, and off you go.  That’s what you do, isn’t it?

It is, that’s right.

It’s cheap, it’s cheaper than listing that’s for sure.

What happens is the near dead company that is still listed buys your company in return for shares.

Yeah, the reverse takeover.

It’s the reverse takeover, they buy your business, issue you a whole bunch of shares, the old shareholders of the company end up owning 5% of the business and you own 95% of the business, and away you go.

I hope it’s not a Bitcoin company, Loki, but who knows, a Bitcoin related company, because a few of them are doing backdoor listings at the moment and taking over.  Of course, mining – if you’re looking for a half-dead company then all you’ve got to do is look at miners because there’s hundreds of them out there, even in good times.  Even in gold alone you could find hundreds of half-dead listed companies.

Including the ones that pretend they’re alive.

Yeah, that’s right, and most of them pretend they’re alive.  Okay, well we might leave it there for today, Alan, that was a good session and thanks again to our sponsor, BT Financial Group.  Don’t forget, folks, you can subscribe to The Money Café on Apple Podcasts or your app of choice.  While you’re there it’s very helpful if you could leave a review or a rating, it helps listeners find the show.  Send in your questions, we’ll answer it on next weeks episode.  The e-mail for questions is hello@theconstantinvestor.com.  Until next week, I’m James Kirby, Wealth Editor at The Australian.

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

Talk to you soon.