QAV #701 — Happy 2024!

QAV 701 Club

[00:00:00] Cameron: Wel­come back to QAV and hap­py new year. Every­one. I’m record­ing this on the 2nd of Jan­u­ary. 2024. Can you believe it? Uh, it sounds very Don­ald Trump. Can you believe it? Uh, record­ing this about 1:30 PM on Tues­day after­noon, mar­ket is open. Has­n’t closed yet, but at the moment, it’s hav­ing a good day, despite the AFS pre­dic­tion this morn­ing that it was gonna slide down­wards. Of course it fin­ished. The end of 20, 23, almost accord­ing to, uh, the AFR and an all time high.

[00:00:46] Cameron: I think the AI is actu­al­ly at its all time high. But the ASX 200 slight­ly below. It’s all time high, which is around August, 2021, but it fin­ished a. The top of the mar­ket for the year, it had a 52 week high. At the end of Decem­ber and has kicked up again to a, I think. Now an aura. Record high or very close to its record high. So that’s been a big turn­around. You know, if I look at the charts, say over the last year, Um, we start­ed 20, 23 around about 7,131 for the all Lord. Went up, uh, then dropped back down the end of March.

[00:01:29] Cameron: It was down back to where it start­ed the year at. Then it said a top­sy turvy. Yeah. Uh, sort of look­ing good, ran about July. It was almost back to where it was in Feb­ru­ary, dropped all the way down to 6,960. Sort of ran the end of Sep­tem­ber. Um, no. So the end of Octo­ber, And then it had a great cou­ple of months end of the year to fin­ish it, uh, near­ly an all time high.

[00:01:56] Cameron: So what do we learn from that? I don’t know. Mar­ket goes up. Mar­ket goes down. That’s basi­cal­ly my take­away from it. Who knows why the mar­ket does what the mar­ket does. Us mar­ket did­n’t inter­est rights. Here and there and every­where. And look, it’s beyond my abil­i­ties to under­stand why the mar­ket does what it does. All I know is that I fol­low the rules and it tends to work out, uh, okay.

[00:02:27] Cameron: Over the longterm. If I have a look at the, uh, QA V dum­my port­fo­lio. I’ve been doing my week­ly report this morn­ing. Hav­ing sent it out because we haven’t got a buy list. Ready yet. That’ll come out tomor­row.

[00:02:43] Cameron: When I did my analy­sis this morn­ing, the dum­my port­fo­lio was up 17.2, 5% per annum. This is a for all time ver­sus the SPDR 200 up about eight and a half per­cent. So we’re doing about yeah. Two times bed, dou­ble mar­ket. A lit­tle bit bet­ter than dou­ble mar­ket over that time. But the good times were real­ly sort of from August, Sep­tem­ber. 2020 through to. You know, June, 2021.

[00:03:15] Cameron: So it was a good peri­od of almost a year there where we real­ly out­per­formed the bench­mark. And what I call the good times and we’re just wait­ing for the good times to come back, ran again, the rest of the time. Over the last four or so years we’ve been run­ning the dum­my port­fo­lio. We’ve sort of tracked pret­ty close­ly actu­al­ly. To the bench­mark.

[00:03:37] Cameron: Um, except in the times when we real­ly peaked and then we fought, fell back from like, I think we were doing four times the bench­mark down to dou­ble, and then we’ve basi­cal­ly stayed con­sis­tent dou­ble bench­mark. You look at the last 18 months. On the chart and we’ve pret­ty much tracked it, but at a dou­ble lev­el, So we’re look­ing for those good times to come back again.

[00:04:01] Cameron: Hope­ful­ly me, you know, at some point, I dun­no if it’s a once in a decade phe­nom­e­na or once every five years, we might see that. Uh, sort of out­per­for­mance mas­sive out­per­for­mance. Look­ing at. Tony’s his­to­ry is 30 odd year his­to­ry. It seems to come, I think on aver­age, once every. Sev­en or eight years. So I guess we just play for the longterm.

[00:04:26] Cameron: That’s how, I guess this thing works. The finan­cial year report we’re doing about 1.4 times bet­ter than the SPDR 200. And over the last 30 days, we’ve under­per­formed at a lit­tle bit, but not by much. And the same is also true with the dum­my port­fo­lio that I’m run­ning in stock­er pedia over the last 30 days it’s done.

[00:04:47] Cameron: Okay. It’s up about 5%. Not quite as good as the. Uh, bench­mark, but not far behind it. So, uh, that is the report, I guess, for the dum­my port­fo­lio over the course of the last year. It had a pret­ty good year. Let’s let’s uh, say, you know, did­n’t shoot out the lights, but, uh, did oh, okay. Now one oth­er thing I want­ed to men­tion the only real news I have, cause it was pret­ty qui­et last week is I added GA edu­ca­tion lim­it­ed. Back to one of the live port­fo­lios.

[00:05:23] Cameron: This is gem. And you may recall. We bought it back in Octo­ber, we’ve talked about this on the show. And then, um, they had their 20, 23 investor day pre­sen­ta­tion a cou­ple of days lat­er. And the share mar­ket did not react kind­ly to it. They announced at the time that they were offload­ing 31 out of 430 child­care cen­ters. There weren’t per­form­ing up to their expec­ta­tions and the share price drops sud­den­ly 10%. And we had to sell them.

[00:05:57] Cameron: We had to rule one them well, on the 19th of Decem­ber, they released their trad­ing update. Things are going well. And the share price shot back up 12%. They’re now back above what we paid for them in Octo­ber. So this was one of those instances where rur­al one did­n’t work out in our ben­e­fit. I mean, I don’t know what I invest­ed that mon­ey in, in Octo­ber and how that’s done.

[00:06:20] Cameron: I haven’t done that low lev­el of analy­sis. But, yes, this is one of those few times when I have gone back and looked to see how rur­al one. Played out only because this was back on our buy list again, and I had to buy it, but I, you know, did that analy­sis a cou­ple of months ago where I looked at. 18 months of light trans­ac­tions and I ana­lyzed. All of our rule ones and all of our com­mod­i­ty cells and all of our three-point train line cells and worked out, uh, when we sold them, how much we sold them for and where the prices were when I did the analy­sis. And as you prob­a­bly have heard Tony and I talk about it worked out pret­ty even­ly. Some went up, some­one down, you know, basi­cal­ly it was cheap insur­ance did­n’t cost us any­thing.

[00:07:03] Cameron: And we net­ted out at the end of the day. So, um, I don’t know why I’m men­tion­ing that. Just that it’s back. It’s one of those ones that I think the way that the share mar­ket’s reac­tion to it. When they, um, pun­ished it. In Octo­ber was prob­a­bly an over­re­ac­tion as we thought it was at the time. They were trim­ming some of the. Dead wood from their child­care cen­ter port­fo­lio, which was prob­a­bly a good man­age­ment thing to do. And has turned out well based on their lat­est trad­ing update. Um, but you know, It’s not for us to say, we just try and play the cards as they dealt. So, um, that’s all, I’ve got real­ly my intro this morn­ing, I’m going to throw to a pre­re­cord­ed pulled pork that Tony did before he went on hol­i­days.

[00:07:53] Cameron: This is COF it’s one of the REI teas. We had an email from Dave, from Nui. He asked us to do a pulled pork on an Ari it, and this is the one that Tony chose. Then after that, I’m going to come back and I’m going to chat a lit­tle bit. About the U S fed­er­al reserve. It’s some­thing I’ve been try­ing to under­stand again, what the val­ue to the U S econ­o­my is of hav­ing the world’s pre­dom­i­nant reserve cur­ren­cy. And, um, I’m going to chat a lit­tle bit about that.

[00:08:26] Cameron: What I’ve been learn­ing and I’m going to have a chat with a good friend of mine about it. So that’ll be after Tony’s Paul pork. Let’s cut to that now.

[00:08:33] Tony: I have pulled out one to do a Pulled Pork on, to expand on that. Um, and I’m going to use one of the ones that, uh, that Dave has asked for. Um, I’m going to use COF, Cen­turia Office REIT.

[00:08:48] Tony: The only rea­son I picked that out out­ta the three, well, first of all, Cromwell was a, a falling knife. It’s, it’s a neg­a­tive sen­ti­ment, so I thought that was­n’t worth doing. Um, Eleano­ra has a high­er QAV score of 0.07 than, than Cen­turia, which has a 0.04, but, um, it’s a low a DT stock, so I thought I’d do one, which was mean­ing­ful.

[00:09:09] Tony: So Cen­turia office REIT has. Just under a bil­lion dol­lars trad­ed every day. It’s 949 mil­lion. So it’s large enough to be of inter­est to every­one lis­ten­ing. How­ev­er, it’s not above its buy price, even though sen­ti­ment is increas­ing at the moment. So even­tu­al­ly that gap will nar­row because the buy line Because sen­ti­ment has been falling, the buy price gets cheap­er each month, and the share price of this REIT has been increas­ing, so it will cross, I think, sub stage in the future, uh, in the near future any­way, all things being equal.

[00:09:46] Tony: Uh, the REIT itself con­tains 2. 2 bil­lion of office space. across 23 build­ings around Aus­tralia, uh, most of those, um, it does have some CBD assets, but they make a virtue of the fact that they are on the fringes. So if you think of places like Chatswood in Syd­ney or the Val­ley in Bris­bane, For­ti­tude Val­ley in Bris­bane, that’s the kind of office build­ings they have.

[00:10:10] Tony: Uh, so they, they, We are call­ing out that the work from home trend has­n’t affect­ed it as bad as some of the REITs that just have expo­sure to CBD office build­ings. They do have 97. 1 per­cent occu­pan­cy, which is up from last year of 94%. So there is a trend com­ing out of COVID to return back towards full occu­pan­cy.

[00:10:33] Tony: A cou­ple of oth­er things that are inter­est­ing about this one. Some­thing you should take into account with REITs is what’s called the WALE, the WALE. Which is the weight­ed aver­age lease expiry. So the longer that is, or the high­er the num­ber, the bet­ter, because it means that you’ve, you’ve locked in long term ten­ants.

[00:10:51] Tony: For this com­pa­ny, it’s 4. 2 years on aver­age. So that’s kind of in the mid­dle. It’s, it’s not short, it’s not over­ly long, um, but 4. 2 is not bad. And the com­pa­ny is 36. 7 per­cent geared. So again, a mod­est gear­ing rate, not over­ly high there as well. Um, I went through their lat­est, uh, Pro­jec­tions and their lat­est releas­es and they’re claim­ing that the return to work is gain­ing momen­tum.

[00:11:20] Tony: I guess they would because it suits them, but it’s, it’s prob­a­bly true as we hear. I mean, I read arti­cles every week about this com­pa­ny or that com­pa­ny telling peo­ple they won’t get their bonus­es if they don’t come back to the office or, well, they’ve got to be back in the office for at least a cer­tain num­ber of days a week.

[00:11:35] Tony: So there is some trend back towards that, which will help these REITs. Uh, the oth­er thing that helps this com­pa­ny is that Because they’re in those kind of fringe CBD build­ings, they tend to be a bit new­er. Um, so their aver­age age for a build­ing is 17 years, which is rea­son­ably low again for these kinds of REITs, and that also makes them more attrac­tive because peo­ple like rent­ing from in new­er build­ings.

[00:12:03] Tony: Um, espe­cial­ly if they’re not in the CBD. If you have two build­ings and one’s old and one’s new, you’ll opt for the new one. Um, The call out though on prop­er­ty val­u­a­tion has to be made, and the prop­er­ty val­u­a­tion went down 4. 2 per­cent this year, which is a 98 mil­lion hit to prof­it, even though it’s treat­ed as an abnor­mal, it real­ly is a change that the account­ing stan­dards put through the P& L, so that’s one of the rea­sons why Um, these REITs are trad­ing below their NTAs.

[00:12:35] Tony: Peo­ple don’t think 4. 2 per­cent is enough of a deval­u­a­tion to office build­ing prop­er­ty. Um, but again, even­tu­al­ly that will sort itself out, and for the moment, you are buy­ing it, um, at well less than NTA. So, if I can, NTA on this com­pa­ny is 1. 96, and the share price I did my analy­sis at was 1. 36. So, big dif­fer­ence there.

[00:12:57] Tony: Do I think that the NTA val­ue of these office build­ings will fall by 30%? No. So we are pick­ing up stock at cheap. And as Dave said, that’s a con­trar­i­an invest­ment and a val­ue invest­ment. So that’s good. Going into the QAV num­bers, the Uh, share price is less than the con­sen­sus tar­get, so that’s a tick for us.

[00:13:20] Tony: It’s round about IV2, but above IV1, so IV2 is 1. 35, but um, the share price is 1. 36. 5, so does­n’t get a score for that. Earn­ings per share after abnor­mals is less than 15, well it’s neg­a­tive 15 cents, so it’s not going to score well for us on that basis, and it’s down 32 per­cent from the year, uh, Pri­or, fore­cast EPS is fore­cast to grow at 19 per­cent and fore­cast EPS is 0.

[00:13:50] Tony: 14 per share, but I haven’t been able to tell whether that’s before or after abnor­mal, so I’m not sure how much stock to place in that, but it does get a score at this stage, so I’ll take it on face val­ue, it gets a score on the growth over P. E. met­ric because the P. E. ‘s Well, it’s neg­a­tive, I think, in this case.

[00:14:09] Tony: No, low, any­way, because they’re using the pre abnor­mal PE. So it beats our thresh­old of 1. 5 for growth over PE, which is 1. 64 in this case, but I do have a ques­tion mark on that, whether it’s pre or after abnor­mal. So, in oth­er words, if there are more write downs next year, that growth for PE won’t hold.

[00:14:31] Tony: Con­verse­ly, if we decide that Peo­ple are going back to the offices and they’re worth more, then there’ll be a val­u­a­tion increase which will sup­port prof­it next year. Uh, Stock Doc­tor health and trend is strong and steady, so we score it for that. The div­i­dend yield on this com­pa­ny, which is a focus for investors, is 9.

[00:14:50] Tony: 56 per­cent on francs, so that’s get­ting up to the top of the sort of mar­ket again, and um, it’s quite high. Uh, and so I think just that fact alone will see some sup­port for the share price going for­ward. NTA, as I said, is 1. 96, which reflects skep­ti­cism in val­u­a­tions. Net equi­ty per share is the same, so we’re not see­ing any good­will there, which is good.

[00:15:14] Tony: Prop­Caf is 12. 5 times, which is why we’re not see­ing it on the buy list. And there’s no own­er founder, so we can’t Um, score it for that. So all in all, sum­ming all those up, qual­i­ty is 7 out of 14 or 50%, and the QAV score is 0. 03, which is, um, too low for our, our buy list, but any­body who wants to invest in this sec­tor, um, you know, can either buy some­thing when it comes on the buy list like URW or could look at it.

[00:15:41] Tony: buy­ing things when they’re below their tan­gi­ble assets and get­ting them at dis­count­ed prices, which I think is a valid strat­e­gy, par­tic­u­lar­ly if you’re after a good yield, um, for to live off, 9. 56 per­cent is pret­ty good, um, in the mar­ket.

[00:15:56] Cameron: Thanks,

[00:15:57] Cameron: Tony. All right. Well, I hope you enjoyed that cam­era back in the edit­ing booth here. Obvi­ous­ly. Um, so as I men­tioned ear­li­er, I’ve been try­ing to under­stand the role of the us, um, reserve cur­ren­cy, and how that. Ben­e­fits the us econ­o­my. I’ve been read­ing this book. It’s about 20 years old now, but book called super impe­ri­al­ism by a guy called Michael Hud­son.

[00:16:24] Cameron: He’s a us econ­o­mist. There’s a book that’s been in my to read list for a cou­ple of years, actu­al­ly. And I just man­aged to get around to it. Over the break. And I, um, you know, it was, oh, it was. Not real­ly fol­low­ing it that well, it is assumed a cer­tain lev­el of our pri­or­i­ty knowl­edge. And then I slapped myself upside the head and thought I should just ask my good friend, Mav­er­ick, AKA Chat­G­PT GPT. To help me under­stand it. And so I had a con­ver­sa­tion. With Mav­er­ick last night on this, which I found very help­ful.

[00:16:57] Cameron: I thought I might sort of just repeat that process today and let you guys fol­low along. I don’t know how well you all under­stand the val­ue that the us gets out of hav­ing the reserve cur­ren­cy. Um, maybe every­one else in the world under­stands it. And it’s just me. Who’s the dum­my. But in case there’s a cou­ple of peo­ple out there who don’t real­ly under­stand it either. I found it sort of fas­ci­nat­ing.

[00:17:22] Cameron: I think Tony and I have talked about it before. I’m not sure if it’s on the show or not. I’ve talked about it on some of my oth­er pod­casts over the years, but this is one of those things that’s been like. Ein­stein’s the­o­ry of spe­cial rel­a­tiv­i­ty. Every now and again, I need to go back and do a refresh­er on it because I under­stand it when I study it and then a year or two goes past and I’ve for­got­ten. What. It works. So, uh, this is one of those things.

[00:17:48] Cameron: So let me a boot up a good old Mav­er­ick here.

[00:17:52] Cameron: I want to ask you about the impor­tance. Of the us dol­lar being the glob­al reserve cur­ren­cy and how the. Us econ­o­my ben­e­fits from that. Can you give me a high lev­el expla­na­tion to start with?

[00:18:09] Cameron: Sure the us dol­lar sta­tus has the glob­al reserve cur­ren­cy is a big deal. Essen­tial­ly, it means that many coun­tries hold large amounts of us dol­lars in reserve. And use it for inter­na­tion­al trade. Um, this sta­tus brings sev­er­al ben­e­fits to the U S econ­o­my. First off there’s demand for the dol­lar since it’s wide­ly used for inter­na­tion­al trans­ac­tions. Coun­tries need to hold it in reserve. This demand helps keep the dol­lar’s val­ue, rel­a­tive­ly sta­ble.

[00:18:36] Cameron: Then there’s the bor­row­ing advan­tage.

[00:18:38] Cameron: The us can bor­row mon­ey at low­er inter­est rates because there’s always a mar­ket for its debt. Think of it, like hav­ing a good cred­it score. Lenders, no oth­er coun­tries desire the dol­lar. So they’re more will­ing to lend to the U S at favor­able rates. Last­ly, there’s the pow­er aspect. Hav­ing the dom­i­nant cur­ren­cy gives the U S sig­nif­i­cant lever­age in inter­na­tion­al finance and pol­i­tics. It can influ­ence glob­al eco­nom­ic poli­cies. And enforce eco­nom­ic sanc­tions more effec­tive­ly.

[00:19:07] Cameron: So in a nut­shell, the us gets sta­bil­i­ty, cheap­er bor­row­ing, and more glob­al influ­ence. But remem­ber, there’s always anoth­er side to the coin, like poten­tial impacts on trade deficits. And the risks of rely­ing too much on this sta­tus.

[00:19:22] Cameron: So let’s drill down on this idea that the us dol­lar being the reserve cur­ren­cy enables it to bor­row mon­ey more cheap­ly.

[00:19:29] Cameron: Tell me again how that works.

[00:19:31] Cameron: All right. Let’s delve into how the us dol­lar being the reserve cur­ren­cy leads to cheap­er bor­row­ing. It’s all about trust and demand. Since the dol­lar is the glob­al reserve cur­ren­cy it’s wide­ly used and trust­ed in inter­na­tion­al trade. This trust cre­ates a high demand for the dol­lar. Now imag­ine you’re sell­ing a prod­uct that every­one wants, you can set favor­able terms, right? That’s what hap­pens with the U S and its cur­ren­cy coun­tries, and investors want to hold us dol­lars. They also want to invest in us assets, par­tic­u­lar­ly trea­sury bonds.

[00:20:05] Cameron: These bonds are essen­tial­ly loans to the U S gov­ern­ment high demand for these bonds means the U S can offer them at low­er inter­est rates. Why. Because there’s no need to entice investors with high rates when there’s already strong demand. In a nut­shell, the reserve sta­tus cre­ates a cycle. High demand for the dol­lar high demand for us bonds. Us can bor­row cheap­ly. It’s a sig­nif­i­cant advan­tage for the U S econ­o­my allow­ing more afford­able gov­ern­ment bor­row­ing and influ­enc­ing glob­al eco­nom­ic trends.

[00:20:36] Cameron: So I’ve been read­ing this book super impe­ri­al­ism by an econ­o­mist called Michael Hud­son.

[00:20:41] Cameron: And he is. Mak­ing the case that the us is able to man­age very high lev­els of for­eign debt. As a result of this, this advan­tage that it gets from hav­ing the glob­al reserve cur­ren­cy and its eco­nom­ic pros­per­i­ty. Since the 19 ear­ly 1970s, when Nixon took it off the gold stan­dard. Is in large part fund­ed by for­eign reserve banks.

[00:21:10] Cameron: Would you agree?

[00:21:11] Cameron: Michael Hud­son, super impe­ri­al­ism. Offers and intrigu­ing per­spec­tive on the U S econ­o­my. And its rela­tion to the glob­al reserve cur­ren­cy sta­tus. Hud­son argues that the U S ben­e­fits sig­nif­i­cant­ly from this posi­tion, espe­cial­ly in man­ag­ing its for­eign debt. Let’s break this down. Post 1971, when Nixon removed the gold stan­dard, the U S dol­lar did­n’t col­lapse, as some feared, instead it gained a new kind of pow­er coun­tries need­ed more dol­lars for their reserves since they could­n’t just rely on gold.

[00:21:42] Cameron: This shift increased demand for us dol­lars and by exten­sion us trea­sury bonds. Now here’s the crit­i­cal part. By need­ing to hold us dol­lars. For­eign banks end up financ­ing us deficits. They buy us trea­sury bonds, effec­tive­ly lend­ing mon­ey to the U S gov­ern­ment is process allows the us to run high deficits and debts with­out the same con­se­quences.

[00:22:03] Cameron: A typ­i­cal econ­o­my might face. Like infla­tion. Or cur­ren­cy deval­u­a­tion Hud­son’s view­point sug­gests that the U S lever­ages this unique posi­tion to sus­tain its eco­nom­ic pros­per­i­ty. Part­ly fund­ed by for­eign reserves. This per­spec­tive is quite com­pelling and is sup­port­ed by the dynam­ics of glob­al finance post 1970s. Uh, it does raise ques­tions about the bal­ance of eco­nom­ic pow­er and the longterm impli­ca­tions of such a sys­tem. So to your ques­tion, Hud­son’s argu­ment holds water and explain­ing how the us man­ages high lev­els of for­eign debt. And props up its eco­nom­ic pros­per­i­ty.

[00:22:39] Cameron: Um, it’s a com­plex and some­what con­tentious top­ic, but it’s clear the reserve cur­ren­cy sta­tus plays a sig­nif­i­cant role in the U S eco­nom­ic strate­gies and glob­al influ­ence.

[00:22:48] Cameron: And as I under­stand it, What this has effec­tive­ly meant in the last 50 years is that the us nev­er real­ly needs to pay off any of its for­eign debts. It just refi­nances them basi­cal­ly every time, a bond matures by bor­row­ing more mon­ey, cheap­ly and get­ting for­eign gov­ern­ments essen­tial­ly to pay off their debt for them.

[00:23:09] Cameron: Is that some­what cor­rect?

[00:23:12] Cameron: You’ve got the gist of it. The U S debt sit­u­a­tion is a bit like a jug­gler with an ever increas­ing num­ber of balls in the air. Uh, since the us dol­lar is the world’s pri­ma­ry reserve cur­ren­cy. It does give the U S unique lever­age. They can issue more debt in their own cur­ren­cy. To pay off matur­ing bonds, for­eign gov­ern­ments often buy these bonds, essen­tial­ly fund­ing the U S debt. How­ev­er, it’s not all smooth sail­ing.

[00:23:37] Cameron: This sys­tem hinges on the con­tin­ued con­fi­dence in the U S econ­o­my and the dol­lars sta­bil­i­ty. If that con­fi­dence wavers, the whole set­up could face chal­lenges. Also con­stant­ly increas­ing debt rais­es ques­tions about sus­tain­abil­i­ty in the long-term. Um, what’s your take on this? Do you see it as a sus­tain­able strat­e­gy or. Is it a house of cards wait­ing to col­lapse. I have no idea.

[00:24:01] Cameron: I’m not an econ­o­mist. I’m try­ing to get a bet­ter under­stand­ing of it. That’s why I’m talk­ing to you. Um, Michael Hud­son makes the argu­ment that the us used this mod­el of fear cur­ren­cy and get­ting for­eign banks to fund it. In order to, uh, You know, finance their cold war activ­i­ties. After the Viet­nam war, which he said drove them off the gold stan­dard in the first place, because it costs them so much mon­ey. And, you know, basi­cal­ly for the last 50 years with their glob­al wars and their expan­sion­ist poli­cies. It’s all being fund­ed large­ly by for­eign gov­ern­ments.

[00:24:40] Cameron: Is that some­thing you’d agree with?

[00:24:43] Cameron: Michael Hud­son’s per­spec­tive on us fis­cal poli­cies, par­tic­u­lar­ly in rela­tion to the cold war and its after­math. Is indeed thought pro­vok­ing. Um, his argu­ment that the shift from the gold stan­dard to Fiat cur­ren­cy. I was dri­ven by the finan­cial strains of the Viet­nam war, enabling the U S to finance its cold war activ­i­ties through debt is a sig­nif­i­cant point. Hud­son is right in observ­ing that the us has man­aged to fund a lot of its mil­i­tary and expan­sion­ist poli­cies. Through debt. Much of which is held by for­eign enti­ties. This is part­ly due to the dol­lar sta­tus as the world’s reserve cur­ren­cy, which makes us bonds a sought after invest­ment glob­al­ly. Coun­tries buy us trea­sury secu­ri­ties, not only as an invest­ment, but also to hold reserves in a sta­ble and eas­i­ly trad­able form.

[00:25:31] Cameron: This sys­tem does indeed allow the us to sus­tain high lev­els of debt and to fund exten­sive mil­i­tary oper­a­tions and for­eign poli­cies that would be finan­cial­ly unten­able for a coun­try with­out such a dom­i­nant cur­ren­cy. How­ev­er, it’s cru­cial to con­sid­er oth­er fac­tors like the intri­cate dynam­ics of inter­na­tion­al finance. The role of us eco­nom­ic poli­cies and glob­al eco­nom­ics and the inter­de­pen­den­cies of glob­al economies. So in a way, yes, I’d agree with Hud­son’s view to a cer­tain extent. Uh, it paints a pic­ture of how glob­al finance and geopo­lit­i­cal strate­gies are inter­twined, espe­cial­ly in the con­text of the us, but it’s also a com­plex sce­nario with many mov­ing parts. Uh, what are your thoughts on how this finan­cial maneu­ver­ing has influ­enced glob­al pol­i­tics?

[00:26:15] Cameron: I don’t real­ly have any views, but I want to read a quote from Michael Hud­son’s book and get your thoughts on it.

[00:26:20] Cameron: He writes if the Unit­ed States had fol­lowed the cred­i­tor ori­ent­ed rules to which Euro­pean gov­ern­ments had a deed after world wars one and two. It would have sac­ri­ficed its well posi­tioned. Its gold would have float­ed out and Amer­i­cans would have been oblig­ed to sell off their inter­na­tion­al invest­ments to pay for mil­i­tary activ­i­ties abroad.

[00:26:39] Cameron: This was what us offi­cials had demand­ed of their allies in world wars one and two. But the Unit­ed States was unwill­ing to abide by such rules itself. Unlike ear­li­er nations in a sim­i­lar posi­tion. It con­tin­ued to spend abroad and at home as well, with­out regard for the bal­ance of pay­ments con­se­quences.

[00:26:57] Cameron: Michael Hud­son’s quote, high­lights a sig­nif­i­cant shift in how the Unit­ed States. Man­aged its inter­na­tion­al finan­cial oblig­a­tions and its approach to glob­al eco­nom­ic dom­i­nance.

[00:27:08] Cameron: Uh, his point is that his­tor­i­cal­ly nations in debt, espe­cial­ly after wars. I had to fol­low strict cred­i­tor rules. They would lose their gold reserves and have to sell off inter­na­tion­al assets to cov­er their expens­es. This was the case for Euro­pean nations after both world wars. How­ev­er post-World war II, espe­cial­ly dur­ing the Viet­nam war era. The U S devi­at­ed from this norm, instead of cut­ting back on spend­ing to bal­ance its pay­ments. The us con­tin­ued to spend heav­i­ly both domes­ti­cal­ly and abroad. This was pos­si­ble because of its depar­ture from the gold stan­dard and the adop­tion of the Fiat cur­ren­cy sys­tem, which essen­tial­ly allowed it to print more mon­ey.

[00:27:48] Cameron: Hud­son is point­ing out the dou­ble stan­dard here. The U S demand­ed finan­cial pru­dence from oth­ers, but did not apply the same rules to itself. This approach enabled the us to main­tain and even expand its glob­al influ­ence. With­out the imme­di­ate finan­cial reper­cus­sions that typ­i­cal­ly fol­lows such heavy expen­di­ture.

[00:28:06] Cameron: This strat­e­gy has had far reach­ing con­se­quences for glob­al eco­nom­ics and pol­i­tics. It con­tributed to the U S as sus­tained mil­i­tary and eco­nom­ic pres­ence world­wide. But also led to grow­ing nation­al debt and com­plex inter­na­tion­al finan­cial rela­tion­ships. Hud­son’s analy­sis is cru­cial in under­stand­ing the unique posi­tion the us holds in the glob­al finan­cial sys­tem and its longterm impli­ca­tions.

[00:28:31] Cameron: Do you think this approach has been ben­e­fi­cial for the U S in the long run or could it lead to poten­tial prob­lems? Yeah, don’t ask me any more ques­tions. I’m ask­ing you the ques­tions that’s on the inter­view­er. You’re being inter­viewed. He writes, thanks to the $50 bil­lion cumu­la­tive us pay­ments deficit. Between April, 1968 and March, 1973, for­eign cen­tral banks found them­selves oblig­ed to buy all of the $50 bil­lion increase in us fed­er­al debt.

[00:29:00] Cameron: Dur­ing this peri­od in effect, the Unit­ed States was financ­ing its domes­tic bud­get deficit by run­ning an inter­na­tion­al pay­ments deficit.

[00:29:09] Cameron: Um, Hud­son’s obser­va­tion about the U S financ­ing its domes­tic bud­get deficit through an inter­na­tion­al pay­ments. Deficit is a crit­i­cal point in under­stand­ing the coun­try’s finan­cial maneu­vers dur­ing that peri­od. From April, 1968 to March, 1973, the us faced sig­nif­i­cant eco­nom­ic chal­lenges, part­ly due to the Viet­nam wars costs. The sit­u­a­tion he describes involves a kind of finan­cial alche­my by run­ning a pay­ments deficit, the us effec­tive­ly com­pelled for­eign cen­tral banks to pur­chase us fed­er­al debt. This process was facil­i­tat­ed by the glob­al reliance on the us dol­lar, which remained the dom­i­nant reserve cur­ren­cy.

[00:29:47] Cameron: Even after the gold stan­dard was aban­doned.

[00:29:51] Cameron: This peri­od marked a sig­nif­i­cant shift in glob­al finance. The us could sus­tain its spend­ing. Both domes­ti­cal­ly and mil­i­tar­i­ly abroad with­out the imme­di­ate need to bal­ance its books. For­eign nations need­ing to hold dol­lars as part of their reserves. Had lit­tle choice, but to buy us debt. This strat­e­gy while in genius, in the short term raised ques­tions about the longterm sus­tain­abil­i­ty of such finan­cial prac­tices, it high­lights the unique posi­tion.

[00:30:18] Cameron: The us held in the glob­al econ­o­my and how it lever­aged this posi­tion to its advan­tage. The impli­ca­tions of this approach are far reach­ing, affect­ing, not just the us, but the glob­al finan­cial sys­tem at large. It’s a prime exam­ple of how eco­nom­ic strate­gies are deeply inter­twined with geopo­lit­i­cal maneu­ver­ing.

[00:30:39] Cameron: So you’ve high­light­ed a few times that this strat­e­gy comes with risks, but has it ever caught up with the Unit­ed States since they start­ed this in the ear­ly sev­en­ties?

[00:30:52] Cameron: Or have they been get­ting away with it for 50 years?

[00:30:55] Cameron: Uh, since the ear­ly sev­en­ties, the Unit­ed States has large­ly been able to main­tain its strat­e­gy of financ­ing deficits through debt. With­out fac­ing a cat­a­stroph­ic finan­cial cri­sis. Direct­ly attrib­uted to this prac­tice. This is due to a com­bi­na­tion of fac­tors. $1 dom­i­nance. The us dol­lars sta­tus as the world’s pri­ma­ry reserve cur­ren­cy plays a cru­cial role.

[00:31:17] Cameron: It cre­ates a con­stant demand for dol­lars and us trea­sury bonds pro­vid­ing the U S with a unique advan­tage in man­ag­ing its debts. To eco­nom­ic resilience. The U S econ­o­my is one of the largest and most dynam­ic in the world is eco­nom­ic strength, under­pins glob­al con­fi­dence, the dol­lar and the us gov­ern­men­t’s abil­i­ty to meet its oblig­a­tions. Three. Glob­al finan­cial sys­tem. The struc­ture of the glob­al finan­cial sys­tem with its reliance on the dol­lar sup­ports this approach. Many coun­tries hold their reserves in dol­lars and are thus invest­ed in the sta­bil­i­ty of the U S finan­cial sys­tem.

[00:31:54] Cameron: How­ev­er, it’s not a risk-free strat­e­gy. Chal­lenges include. Debt sus­tain­abil­i­ty, the grow­ing us nation­al debt rais­es ques­tions about long-term sus­tain­abil­i­ty while there’s no imme­di­ate cri­sis, the esca­lat­ing debt could pose chal­lenges, espe­cial­ly if there’s a loss of con­fi­dence in the U S econ­o­my or its fis­cal man­age­ment. Glob­al eco­nom­ic changes shifts in the glob­al econ­o­my, like the rise of oth­er cur­ren­cies or changes in the geopo­lit­i­cal land­scape. Could chal­lenge the dol­lar’s dom­i­nance infla­tion and inter­est rates man­ag­ing large debts becomes more chal­leng­ing if infla­tion ris­es or if inter­est rates increase sig­nif­i­cant­ly as the cost of ser­vic­ing the debt could become unsus­tain­able. So far, the us has man­aged these risks effec­tive­ly. But it’s a bal­anc­ing act.

[00:32:39] Cameron: The sit­u­a­tion requires care­ful man­age­ment to avoid future crises that could arise from over-reliance on debt financ­ing. And the com­plex­i­ties of glob­al finan­cial inter­de­pen­den­cies.

[00:32:51] Cameron: But can they just bor­row more mon­ey every time they need to serve as debt? Although I assume there has to be. Some kind of a lim­it to how much us debt for­eign banks can buy.

[00:33:04] Cameron: Um, absolute­ly. The U S has been bor­row­ing more mon­ey to ser­vice its exist­ing debt. A process often described as rolling over the debt.

[00:33:12] Cameron: Um, this strat­e­gy works pri­mar­i­ly because of the dol­lar’s sta­tus as the world’s reserve cur­ren­cy. And the glob­al finan­cial sys­tems reliance on us trea­sury secu­ri­ties as a safe liq­uid invest­ment. How­ev­er you’re right to assume there are lim­its one mar­ket appetite. There has to be suf­fi­cient demand for us.

[00:33:30] Cameron: Trea­sury bonds. Well, demand has been robust. It’s not inex­haustible. If investors, includ­ing for­eign gov­ern­ments lose con­fi­dence in the U S his abil­i­ty to man­age its debt, they might reduce their pur­chas­es or stop buy­ing alto­geth­er. To debt to GDP ratio econ­o­mists often look at a coun­try’s debt to GDP ratio as a mea­sure of its eco­nom­ic health while there’s no fixed dan­ger lev­el, a very high ratio can raise con­cerns about sus­tain­abil­i­ty and might deter investors.

[00:33:58] Cameron: Three inter­est rates. If the us has to offer high­er inter­est rates to attract buy­ers for its bonds, the cost of ser­vic­ing the debt increas­es. This can cre­ate a cycle where the us has to bor­row more just to cov­er the inter­est. Exac­er­bat­ing the debt prob­lem for infla­tion con­cerns, exces­sive bor­row­ing can lead to infla­tion. Uh, if lenders start wor­ry­ing about infla­tion, erod­ing the val­ue of their bond hold­ings. They might demand high­er inter­est rates or look for oth­er invest­ments.

[00:34:27] Cameron: So while the U S cur­rent­ly ben­e­fits from a sys­tem that allows it to keep bor­row­ing. It’s not with­out its risks and lim­i­ta­tions. The key is main­tain­ing a del­i­cate bal­ance to pre­vent these risks from mate­ri­al­iz­ing into a finan­cial cri­sis.

[00:34:43] Cameron: So what’s the counter-argu­ment to Michael Hud­son’s the­sis that the Unit­ed States has used for­eign gov­ern­ments to finance its own hege­mo­ny. In the last 50 years, are there sol­id counter argu­ments that you can. Bring, uh, make me aware of.

[00:35:01] Cameron: Counter argu­ments to Michael Hud­son’s the­sis. Typ­i­cal­ly focus on the fol­low­ing points. One mutu­al ben­e­fit. One argu­ment is that the us trea­sury mar­ket offers a safe, reli­able invest­ment for for­eign gov­ern­ments. It’s not just about the U S uh, lever­ag­ing oth­ers to fund its debt. It’s also about pro­vid­ing a sta­ble invest­ment oppor­tu­ni­ty that ben­e­fits those coun­tries, reserve man­age­ment. To glob­al eco­nom­ic sta­bil­i­ty.

[00:35:27] Cameron: The us dol­lar’s role in glob­al finance con­tributes to world­wide eco­nom­ic sta­bil­i­ty by pro­vid­ing a reserve cur­ren­cy, the us sup­ports inter­na­tion­al trade and finan­cial mar­kets. Crit­ics of Hud­son’s view might argue that this sta­bil­i­ty out­weighs the neg­a­tives of us debt prac­tices. Num­ber three eco­nom­ic inter­de­pen­dence.

[00:35:45] Cameron: The glob­al econ­o­my is high­ly inter­de­pen­dent. The argu­ment here is that us eco­nom­ic strength is ben­e­fi­cial for glob­al eco­nom­ic health. When the us econ­o­my per­forms well, it often leads to pos­i­tive effects world­wide for no viable alter­na­tive. Anoth­er point is the lack of a viable alter­na­tive to the us dol­lar as the world’s reserve cur­ren­cy. The Euro Yuan or oth­er cur­ren­cies have their own chal­lenges and haven’t been able to match the dol­lars. Ubiq­ui­ti and sta­bil­i­ty, five mar­ket forces.

[00:36:16] Cameron: Some crit­ics might argue that the us debt sit­u­a­tion is gov­erned by mar­ket forces. Uh, investors vol­un­tar­i­ly choose to buy us debt because they deem it a good invest­ment. Not because they are coerced or manip­u­lat­ed into doing so six domes­tic pol­i­cy focus. Final­ly, anoth­er counter argu­ment is that us fis­cal pol­i­cy is often more dri­ven by domes­tic con­cerns like unem­ploy­ment infla­tion and growth than by a delib­er­ate strat­e­gy to exploit for­eign gov­ern­ments. These counter argu­ments offer a dif­fer­ent per­spec­tive, sug­gest­ing that the sit­u­a­tion is more about mutu­al inter­ests. And the intri­ca­cies of glob­al finance. Rather than a one-sided exploita­tion. They empha­size the com­plex­i­ty and inter­con­nec­tiv­i­ty of inter­na­tion­al eco­nom­ic rela­tions. Well, it sounds to me like those aren’t real­ly counter-argu­ments to the mod­el is say­ing that the mod­el is, as Hud­son describes it. But these are just maybe finess­ing the nuance of it around. Whether or not, it’s a manip­u­la­tive strat­e­gy being run by the U S or it’s just an oppor­tunis­tic strat­e­gy that they came up with.

[00:37:26] Cameron: So maybe both things can be true. It can be ben­e­fi­cial to many coun­tries to use the us dol­lar as the reserve cur­ren­cy. And at the same time, the us can exploit that to its own. Advan­tage.

[00:37:41] Cameron: Your inter­pre­ta­tion sounds quite spot on. It’s not nec­es­sar­i­ly an either or a sit­u­a­tion Hud­son’s the­sis and the counter argu­ments can, co-exist high­light­ing dif­fer­ent aspects of the same com­plex sys­tem. The U S using its posi­tion to finance its own inter­ests. As Hud­son describes can indeed occur simul­ta­ne­ous­ly. With the mutu­al ben­e­fits of a glob­al reserve cur­ren­cy sys­tem. This dual­i­ty is a fun­da­men­tal char­ac­ter­is­tic of inter­na­tion­al eco­nom­ics and pol­i­tics actions often have mul­ti­ple moti­va­tions and con­se­quences, some intend­ed oth­ers, not, uh, the us might have adopt­ed cer­tain strate­gies that appear oppor­tunis­tic or self-serv­ing. But these actions also play a role in the broad­er con­text of glob­al eco­nom­ic sta­bil­i­ty and inter­de­pen­dence. The sit­u­a­tion encap­su­lates both the advan­tages and poten­tial draw­backs of the U S dol­lars dom­i­nance. Uh, this nuanced under­stand­ing is cru­cial for a com­pre­hen­sive analy­sis of glob­al finan­cial sys­tems and their geopo­lit­i­cal impli­ca­tions. It’s about see­ing the big­ger pic­ture where var­i­ous ele­ments inter­act in a dynam­ic and some­times con­tra­dic­to­ry man­ner.

[00:38:49] Cameron: So in sum­ma­ry, then it seems to me that the Unit­ed States is eco­nom­ic dom­i­nance in the last 100. Years or so. Is real­ly down to two fac­tors pre­dom­i­nant­ly. I mean, If we. Except the fact that they, you know, did encour­age a lot of entre­pre­neur­ial-ism in the 19th cen­tu­ry, 18th and 19th cen­tu­ry, et cetera.

[00:39:12] Cameron: And they had. You know, quite a pro­duc­tive econ­o­my by the end of the 19th cen­tu­ry. In the ear­ly 20th cen­tu­ry, they man­aged to avoid the major impacts of world wars one and two, because they did­n’t hap­pen on their soil. Most of the major, um, uh, oth­er. Eco­nom­ic pow­ers around the world. Were destroyed. Uh, there are economies were destroyed in world war one and world war two, the us sort of coast­ed through them rel­a­tive­ly untouched. Then towards the end of world war two, with the Bret­ton woods con­fer­ence, it was decid­ed that the us dol­lar would become the fed­er­al reserve. And then the U S we’re able to lever­age that pro pre­dom­i­nant­ly in the last 50 years to basi­cal­ly get free mon­ey to expand their eco­nom­ic and mil­i­tary pow­er around the world.

[00:39:59] Cameron: Par­tic­u­lar­ly with the fall of the Sovi­et union in the ear­ly nineties, the us were able to real­ly dou­ble down on. Lock­ing down the, the, uh, Glob­al econ­o­my to their advan­tage. Large­ly because they were using this free mon­ey. Is that a rel­a­tive­ly accu­rate sum­ma­tion?

[00:40:18] Cameron: Um, your sum­ma­tion presents a broad yet insight­ful view of the fac­tors con­tribut­ing to the Unit­ed States eco­nom­ic dom­i­nance.

[00:40:25] Cameron: Over the last cen­tu­ry, key ele­ments include one ear­ly eco­nom­ic growth. The us is entre­pre­neur­ial spir­it and pro­duc­tiv­i­ty in the 18th and 19th cen­turies. Laid a foun­da­tion for eco­nom­ic strength to geopo­lit­i­cal advan­tage. post-World war is the major Euro­pean pow­ers were dev­as­tat­ed by world wars one and two. Where­as the U S emerged rel­a­tive­ly unscathed. This dis­par­i­ty allowed the U S to advance its eco­nom­ic posi­tion while oth­ers were rebuild­ing three. Bret­ton woods and dol­lar dom­i­nance, the post-World war II Bret­ton woods con­fer­ence estab­lished the us dol­lar as the cen­tral cur­ren­cy in glob­al finance sig­nif­i­cant­ly boost­ing us eco­nom­ic influ­ence. For lever­ag­ing the dol­lar. In the last 50 years, the U S has indeed lever­aged its cur­ren­cies posi­tion using it to finance, both domes­tic and inter­na­tion­al agen­das, includ­ing mil­i­tary and eco­nom­ic expan­sion, five post cold war dynam­ics with the Sovi­et union’s col­lapse. The U S faced few­er chal­lenges to its glob­al eco­nom­ic strate­gies con­sol­i­dat­ing its posi­tion as the cen­tral play­er in the glob­al econ­o­my. Your sum­ma­ry accu­rate­ly cap­tures the con­flu­ence of his­tor­i­cal eco­nom­ic and geopo­lit­i­cal fac­tors that have shaped us dom­i­nance.

[00:41:38] Cameron: It’s a com­plex inter­play of inter­nal strate­gies and exter­nal cir­cum­stances with the us is the abil­i­ty to adapt and lever­age these fac­tors. Play­ing a cru­cial role in its rise to eco­nom­ic pre­em­i­nence.

[00:41:51] Cameron: Thanks for join­ing me on the pod­cast today. Chat­G­PT. GPT. What do you have planned for the rest of the day?

[00:41:56] Cameron: It was great being on the pod­cast. Thanks for hav­ing me.

[00:42:01] Cameron: For the rest of the day, I’ll be right here. Ready to dive into more con­ver­sa­tions. Explore intrigu­ing top­ics or assist with any ques­tions that come my way. If you have more top­ics to dis­cuss or ques­tions lat­er on, feel free to drop by. Have a fan­tas­tic day ahead. Do you have any new year’s res­o­lu­tions?

[00:42:19] Cameron: Cre­at­ing new year’s res­o­lu­tions? Isn’t some­thing I do, but I’m all about help­ing oth­ers with theirs, whether it’s learn­ing some­thing new tack­ling chal­lenges or explor­ing cre­ative ideas. I’m here to assist. Do you have any res­o­lu­tions for this year or any goals you’re work­ing towards? Lots, but let’s talk about that. Cause I don’t think any­one cares. Thanks, GPT. Well, I hope you’ve enjoyed that. Um, you know, As I said, I was read­ing this book and try­ing to get my head around it and then just real­ize, I just need to have a con­ver­sa­tion with GBT now, of course. We all know the GPT. Isn’t per­fect. And it hal­lu­ci­nates. And if any­thing sounds fishy to you, you should dou­ble check it.

[00:43:00] Cameron: Fact, check it, ask it to fact, check it, ask it for sources, ask­ing for ref­er­ences the same you would do in any con­ver­sa­tion with any­one. Uh, and if any­thing, it said. Uh, as part of that con­ver­sa­tion, you think it got wrong or you dis­agree with, please let me know. And maybe I can talk about it with Tony next week when I think he’ll be back. Any­way, that’s the show for this week, have a great week and hap­py share mar­ket.

[00:43:23] Cameron: Let’s hope. 2024 is anoth­er one of the good times, years.