Can sausages save Bunnings from Amazon?

Here’s this week’s episode of the Money Cafe with Alan Kohler and James Kirby, covering off:

  • The truth about first home buyer grants
  • This week’s GDP data
  • Bunnings backing in its sausages in the coming war vs Amazon
  • Why is Resources Minister Canavan so keen to back coal?
  • An update on the Altair debacle

And here’s a full transcript of the conversation.

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

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

AK: And we are.

Together: The Money Café.

AK: It’s been a very cold day in Melbourne, and we’re snuggling into Saporito Café in Southbank as we usually are. We’re going to be talking today about a few things, GDP, the coming Finkel Report on Australia’s energy, plus a bit on Bunnings, a bit on podcasts, since this is a podcast already, and the latest on Altair Asset Management.

But to start with, we’ve got an actual question from the audience James. We’d like to encourage anyone out there if you want to ask us a question, we’d love to answer it, no problem. All you got to do is write to hello@theconstantinvestor.com and we’ll definitely get the question. We’ve got one from Adam, who says “If we’re in a housing bubble in the east coast, what is the merit/intent of government efforts to get more people into housing? Doesn’t this just encourage entry into a pyramid scheme at the tail end, when far better to wait for it to fall over naturally and then currently homeless people can take their pickings from the rubble.”

What do you think of that, James?

JK: That’s a good question from Adam. I don’t have any problem with his basic premise, actually, that it’s a bubble, first of all.

AK: Is it a pyramid scheme? He didn’t say it’s a bubble, he said it’s a pyramid scheme.

JK: A pyramid scheme is pretty rough, but I don’t have a problem with the basic point he makes. It’s a very hard look at things, that if you assist people into getting into housing, then the problem is you just push up prices. And unfortunately, there seems to be endless evidence that is true. I think there must be better ways of doing it than what they do, which is first home buyer schemes. They’re open for corruption, and there’s endless evidence, in the different states over the years, that they immediately get corrupted. Mum and dad go in behind people, or whatever, and push up the prices.

So yes, I think if you took a really strict, rationalist view, which I’m happy to take on houses, I think Adam, he’s right. If you let the market take its course, it will drop and houses will get cheaper actually.

AK: I agree, and I think that the schemes whereby people are given money, whether it’s out of their super or whatever, to buy houses, I think are misguided. They’re just politically motivated, generally to collect votes.

JK: They’re tiny, they’re arcane actually if you look at them.

AK: And as you say, really all they do is push up prices because people then have more money to spend on buying a house. The way to do it is you’ve got to increase supply to tip the supply/demand balance.

JK: We had a one percent drop in house prices in Melbourne and Sydney, more than one percent, in the last month. But it was only a month, and it’s the month of May. May isn’t a great time for selling houses. Generally, seasonally, it’s a soft month. We’ll see in two or three months’ time, whether this really is the top.

AK: I would say to Adam, you can wait for a long time for the housing market to fall over on it’s on, and then if it does fall over, it doesn’t fall very far.

JK: So far.

AK: I’d be really surprised if we got to the point where there was rubble for homeless people to pick up.

JK: Don’t try and short the housing market folks, it’s a killer play.

What we might talk about, I suppose the biggest issue of the week for most people was the GDP figure. It came in on target for what it’s worth. It came at bang on target, naught point three for the month and one point seven for the year, which is about half of what the government thinks it’s going to be in the budget.

So, are we in trouble? These are very soft figures, aren’t they?

AK: They’re very soft, but they’re not disastrous. We’re not in recession. We haven’t had a recession for 26 years or something.

JK: What do you think of the theory that we haven’t had a recession for 26 years, but virtually every state has had one…

AK: Well, that’s true.

JK: … autonomously.

AK: Well, I couldn’t tell you whether that’s true, I know certainly West Australia has, Queensland has, I just can’t remember…

JK: It’s an interesting observation.

AK: The other point to make about it is if you look at the GDP per capita, which I’ve got on the news tonight, we’ve had two or three recessions, in the past 26 years of GDP per capita. So the fact that we haven’t had a recession for 26 years is almost entirely due to the fact that our population has been growing so much over that time.

It’s to do with the aggregate number…

JK: That’s interesting.

AK: … due to population growth.

JK:  I think the other point is, okay, we haven’t had recessions, but boy oh boy, there was a couple figures that are so, so, so close to zero that it doesn’t make much difference on the streets.

AK: There have been single quarters of negative GDP…

JK: There’s been two the last year.

AK: … including last September.

JK: One of them last year, yeah.

AK: There’s been a couple of negatives. The definition of two consecutive quarters of negative GDP is an arbitrary kind of thing. You can come up with all sorts of different things, including national income. National income is growing again at the moment, but there was a time when it was definitely in a recession for four or five years.

All that stuff is quite arbitrary. The point, I guess, is the economy is growing relatively slowly. It’s not growing fast enough to cause any problems with interest rates, the Reserve Bank will not increase interest rates as a result of what we’ve got, but nor will it reduce interest rates. Some people are saying they should cut rates, I don’t think that’s the case.

JK: I hope they don’t cut interest rates. I sincerely hope they don’t cut interest rates because we’ve got this very, very, low key economy and then you’ve got a strong housing market. What it needs more than anything is a pause, at the very least, on interest rates.

While we’re talking about national issues, I suppose the other big one is the Finkel Report.  For listeners who don’t know what that is, it’s the energy policy report which is due from Alan Finkel and I saw today a fascinating release. It was fascinating in the nature that the stakeholders were as diverse as ACOSS, the union movement, the Business Council of Australia, all signed one statement saying we have to take the Finkel Report very, very seriously, whatever it might say.

It’s fascinating, isn’t it, because obviously what they’re saying is get us beyond the politicians, and get us a national policy of some framework. When is it due?

AK: Friday, tomorrow.

JK: Friday. Okay.

AK: Finkel of course is the chief scientist, he was asked to review our energy policy and future stability and so on of the national energy market. He’s expected to recommend a number of options, one of which will be a low emissions target, whether he actually recommends an emissions trading scheme of some sort I don’t know.

JK: He does not want to go into such granularity as singling out particular commodities is he, like coal and gas?

AK: No, the way it’s been expressed is his job is to recommend the way in which the national energy market should manage the transition from coal to renewables.  It isn’t really at issue whether we’re going to choose between coal or gas or renewables. It’s a question of how do we transition to them from coal to renewables. The transition is clearly taking place. The fact is, and the issue that he’s having to deal with and investigate, is that renewables are a different kettle of fish in terms of providing electricity, they’re entirely different for one reason, because they’re intermittent.

There are times when the sun doesn’t shine or the wind doesn’t blow. With coal and gas it goes all the time. There’s a lot of differences, changes they need to make to the way the market runs.

JK: It’s an interesting time, while at the same time you have different arms of the government together, seems like they can’t wait to give approximately, one and a half billion to Adani.  An unconvincing Indian coal mine concern, which isn’t doing particularly well, which is really indebted, and they’re falling over each other, it seems to me, to put their hand up to give them a grant, if Adani can get the finance together, which they may never do.

AK: That’s right, it’s all a bit of a mystery to me to be honest. It seems to me such a colossal coal mine. It’s massive. And India seems to be going as fast as they can away from coal, they’re building renewables lickity split.

JK: I think the whole story is about this guy, Gautam Adani, this obviously brilliant billionaire who is able to mesmerise people into deals. He’s mesmerising the Queensland government and the infrastructure authority, and Matt Canavan, if I could say, the Resources Minister, who seems can’t wait to hand over the money.

AK: I think it’s all very mysterious and I don’t entirely understand it. I think it’s unlikely to be, and I’ve written this in The Australian, but we’ve seen the last coal fired power station built in Australia. Apparently they’re building them in China and India, they are building some more. But we’re definitely coming to the end of coal. I’d be very surprised if Guatam Adani raised the money for the mine, very surprised.

JK: On his side? Yeah, that’s right. Westpac won’t give him anything anyway.

AK: Who’s going to finance the thing?

JK: A lot of international banks have already said “We’re not doing coal.” People are running away from coal.

AK: Your list contains “Altair, the latest.”

JK: Altair the latest, yeah, we’ve got to bring people up to speed on that.

AK: I’ve been a bit focused on other things.

JK: Can I say you’ve been a bit, you were a bit soft on my friend Phil and his Altair Management Group. You said I went in hard in the commentary when he gave the money back. The more we find out about this story, the worse it looks. Let’s remind people.

Phil Gardner, what happens. Phil Gardner, not Phil Gardner, what’s his surname?

AK: I’m sitting here shellshocked after you accused me of being soft on the bloke.

JK: You took him at his word, maybe you were very-

AK: He announced that he was going for cash, that he was cashing in all his money and giving it back to the clients…

JK: Which was an extraordinary thing to do.

AK: It was an extraordinary thing to do, yes. I then went to interview him…

JK: And he blamed the property market.

AK: And he blamed the property market. I recorded what he said and published that. I didn’t write any commentary about it. You wrote a commentary saying he’s an idiot or whatever you said.

JK: I said it was unconvincing, completely unconvincing, his explanation. Phil Parker, Phil Parker, excuse me.

AK: That’s fine.

JK: Phil Gardner, by the way was a former editor on the Herald Sun. Sorry about that.

AK: Turns out, the day after we spoke, turns out he’s getting sued by his Mum, for a start, since then he has said it’s got nothing to do with that. It’s only about the property market. Then, something else emerges.

JK: On top of the extraordinary fact that he gave all the money back, which was so unconvincing, because if the company was any good he’d have sold it. Fund management companies are very, very lucrative. There’s a ratio for how much you have under management to how much you get. That was the first thing that wasn’t convincing. The second thing was, the whole explanation about the property market. Yeah, yeah, yeah, but it’s an equities fund. It’s a domestic equities fund. I don’t see Geoff Wilson or Roger Montgomery or anybody else giving their money back, and they never will because they’re well capable of managing it in any climate.

Anyway, on top of mum, mummy dearest suing the son, we now find out that a director of Altair Asset Management, only a few weeks ago, resigned, citing a lack of visibility. He wasn’t able to do his job properly because he didn’t know enough about the affairs of the company.  What do you call that? A red flag, red flag number three.

AK: I agree with you, it doesn’t look good.

JK: It doesn’t look good. So folks, we leave it at that. Apparently, the whole thing is going to come to court in September.

AK: It will be a crowded gallery.

JK: We’ll be there, huh, front row.

AK: Well I don’t think I will be but I’ll certainly be reading what goes on.

JK: We’ll be watching.

AK: What else do we have to talk about? Bunnings.

JK: Bunnings. Now Bunnings has a new, well it’s not new, he’s in there about a year, Michael Schneider, he’s the CEO of Bunnings. They had a Wesfarmers strategy day this week. Someone asked the very, very obvious question, question du jour, which is “Amazon. What are you going to do, how are you going to tackle them, what’s your online proposal?”

And Michael Schneider, head of Bunnings, said we don’t really have an online proposal, we don’t plan to have an online store, people love coming to our shops, having a sausage.

AK: Did he say “Amazon won’t have sausages?”

JK: I don’t know if he brought up the sausages, but the sausages aren’t going to save them Alan.

AK: Well, they’re pretty good,

JK: They’re awesome. But that’s different. Bunnings, this week, said “Actually, our strategy with dealing with Amazon is hoping that people keep coming to the shops.”

The same week, Gabby Liebovich of Catch of the Day, you know the Catch of the Day, Groupon, they’re an online [business], very impressive guys, they’ve build up a 300 million business, 300 million turnover, to be fair, in recent times. He has announced that he’s going to launch an Australian version of Amazon Marketplace to take on Amazon when they come in, so that you have two choices when you go looking for an online marketplace.  If anyone can have a go at it, I think this guy’s capable of it, Gabby Liebovich, because he’s built a business, a 300 million business, out of nothing in three or four years.

It’s just interesting. Bunnings come out and they say “Actually, we’re going to do nothing.” And Gabby Liebovich comes out and says “We’re going to fight them head on.” If I was a betting man, or indeed an investing person, I’d be backing Catch of the Day any day over Bunnings.

AK: I’ll back Amazon over both of them, to be honest. I think-

JK: Well sure.

AK: I think Amazon’s just a bulldozer.

JK: It’s a bulldozer. It is a bulldozer. But I tell you, this guy, Gabby Liebovich, made one very, very good point. In retail, people always like to have a choice, no matter how good number one is, people always like to have a choice when they’re shopping. That’s true, you know. Think about any retailing area, there’s always two, classic being Woolworths and Wesfarmers that have 80% of the market between them.

What about looking overseas to Spain, which hasn’t been on the radar for a while.

AK: So what happened in Spain this week was a bank went broke, called Banco Popular, which I suppose translates to “Popular Bank.”

JK: I suppose so.

AK: Which wasn’t popular enough, because it went broke, and has to be forced into a shotgun marriage with Banco Santander, which is a big…

JK: Is a big operation.

AK: … a big Spain bank there. It’s kind of reminiscent of Bear Sterns and JP Morgan back in 2008, in the middle of 2008, about July that year when Bear Sterns really triggered the crash by putting up the white flag and surrendering. The Federal Reserve forced JP Morgan to buy it. Really, that kind of spooked the markets. The markets had already been spooked by a number of events, but that really put the seal on it.

JK: It was a big scare, wasn’t it?

AK: From that point on, the collapse of Lehman Brothers in September 2008 became inevitable. I think it’s interesting to compare those times with now. We have a big Spanish bank being forced into a marriage with Banco Santander.

JK: Barely a ripple.

AK: Barely a ripple, nobody cares.

JK: Yeah, like norther Iraq, that all happened too, it all happened like dominoes at the time.

AK: It’s kind of fascinating that it found a way to go broke anyway at this time, when Europe is recovering and interest rates are so low, everything seems to be fine. In fact, the official interest rate in Europe is minus point four. So it’s negative.

JK: But maybe they carried problems through-

AK: They found a way to go broke and nobody cared. So that was interesting to compare…

JK: And also, you got to say, volatility in all markets is fairly low at the moment, really. There’s always volatility and Vix average levels are lower than average. There’s only so much you can worry about. The market seems to be fairly firm and ignoring these spectacular, sort of day by day, horrors around Trump. They’re not knocking out markets at all.

AK: Apparently we’re a part of a podcast boom James.

JK: We are.

AK: You’ve had some exposure to that this week.

JK: Some interesting things happened this week. I’m on the board of the Walkley’s Innovation Grants, which is an interesting program we’ve been running for about three years. It gives grants to new start up media. The money, ironically enough, comes from Google mostly, and Isentia and the copyright agency.

Lots of the entries, when I say lots, maybe six, seven entries out of the final 25 short list, were on podcasts. There’s lots of things happening in podcasts.

AK: Were they investigative podcasts?

JK: All sorts, all sorts of podcasts. Cultural, news, but one of the things I’ve always been interested in podcasting, like the early, what we are doing now is the early days of podcasting. You look back and you say, like the early days of internet publishing, when we did Eureka, that was 2004, that was the early days of internet publishing in Australia at least. Or the early days of radio, which must have been so, so much fun. And people were making money as well, which must have been twice as much fun.

AK: We wouldn’t know, we weren’t making any money.

JK: We would make money at the end. But the thing about podcasting is, it’s marvellous, it’s very interesting and people love it. But I’ve yet to come across a business model, apart from being sponsored like we’ve been sponsored by BT, which is great. But an actual standard on podcasting business, and I came across one. It’s called Detour. It comes out of San Francisco, and it’s really worth a look folks if you are interested in podcasting. It’s from the tourism industry. What they do is they do podcast walking tours of the great cities of the world. You sign up and you pay $8.95 for a walking tour, takes about an hour and a half, you pick whatever city you might be in, say London, and it’s like five or six different ones you can do.

You can do Mayfair, you’re taken on tour by a spy. You can do the soccer tour, with Arsenal and Chelsea and you’re taken on tour by a former soccer player. It’s geo coded, so you follow points on a map, you listen to it as you go. Beautiful business, really, really interesting.

AK: So how much did they pay for that plug?

JK: They didn’t pay anything, but I’m looking forward to using it as soon as I can. Not in Australia yet, but…

AK: It’s interesting to watch podcasting develop and the business models. That’s a paid one.

JK: That’s a paid one.

AK: My one in the Constant Investor where we’re doing podcasts, about four hours of podcasts a week, is also paid, because it’s all behind…

JK: You have to subscribe.

AK: … the subscription wall. I’m hoping that turns into a business…

JK: Yes indeed.

AK: … at some point. But most of it has to do with advertising and sponsorship, as you say.

JK: It does, it does. But it’s interesting because you don’t know where it’s going to go. It’s one of those wonderful businesses where it’s at its early days, and anything could happen. We’ll see, and for all you podcast fans we might leave it on our own podcast just there for today.

Don’t forget, you can subscribe to The Money Café on Apple podcasts or your app of choice.  Of course, don’t forget we’d love to have some questions from the audience. An email to hello@theconstantinvestor.com would be very welcome and we will take them onboard and we will seek to answer them every week.

Until next week, I’m James Kirby, Wealth Editor at The Australian.

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

JK: Thanks for listening.

 

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