Bonds and Builders

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Hello, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter, Columnist and Podcaster for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

And we are The Money Café. Good morning, James.

How are you, Alan?

Very well. We're all watching bond yields at the moment and what happened last night?

They just keep rising, Alan. The Bloomberg global bond index is up at the highest point it's been since 2008, the middle of 2008. We've got Australian bond yields at 15-year highs, we've got US 10-year bond yields at the highest point of Trump's second presidency, French bond yields are at the highest point since 2008, German bond yields at the highest point since 2015, British bond yields at the highest point since 2008 and Japanese bond yields on the 10-year bond yield is at the highest point since 1996.

Yes.

This is a pretty sustained move. There's a lot of different factors. Obviously, there's the longer-term factors like governments have got too much debt around the world; then last Friday, we had Kevin Warsh, the new Fed chairman, give a speech at Jackson Hole where the Fed have their annual conference and reaffirmed how committed he is to fighting inflation, so that's pushed up expectations of a rate hike in the US later this month. Then we've had the resumption of hostilities in Iran after a month of no attacks, Trump's bombing things again, oil prices are up about 10 per cent in six days and so that's feeding through to bond yields as well, this pushes up the cost of borrowing for everybody in the economy, households, businesses and governments too. This is a generational move in bond yields, there's no other way to...

We probably should explain a bit what's going on here, because as I explained on the news last night, with shares we watch the price, but with bonds we watch the interest rate. What drives the interest rate obviously is the price, so when the price goes down, the interest rate goes up and when the price goes up, the interest rate goes down. What we're seeing now is that the price is going down, that's really fundamentally what's going on. The price of bonds is falling, driving the interest rate up and the reason the price is falling kind of applies to all markets, which is that supply exceeds demand.

What we've got is supply up because of governments issuing a lot of bonds, a lot of debt; and also, the AI companies, the hyperscalers are issuing a lot of bonds as well to fund their data centres and everything. So there's a huge flood of bonds coming onto the market but demand is down because of, firstly, concern about the creditworthiness of governments now because debt is at record highs and investors are wondering what the hell is going to happen there. They're also wondering about the AI companies and to what extent the revenues from AI will justify the expenditure that's been now debt funded. They're also starting to worry about inflation. As you point out, we've got more oil price rises and the Iran conflict is not coming to an end, so they're now getting worried about inflation as well, so bond investors are starting to get wary and they're not buying unless the interest rate they receive is high enough to justify the risk, does that sum it up?

That's a great little primer there, Alan, yeah. And this matters because the 10-year US Treasury yield, which is now currently sitting at - he says as he checks his screens - is sitting at about 4.8 per cent, the highest level since January 2025, as I said, just before Trump came into the White House. That's the interest rate that sets the price of money across the world, so as that yield rises, the cost of everyone's borrowing continues to go up.

It also is the basis of valuing shares, right? Because analysts tend to value shares according to the present value of future earnings and cash flows, which they discount back to present value using what they call the risk-free rate and the risk-free rate is the US bond rate because US bonds are deemed to be risk-free, although people are starting to wonder about that now, I think it's fair to say.

Yeah. We haven't seen too much damage in share markets because the AI boom is just so strong and earnings created by that AI boom are also so strong. There's so much spending going on on data centres and that's flooding through the economy. There is a good question though and that is, how are those earnings being driven? It's not entirely through AI demand yet. A lot of those earnings are being driven because everybody's prepared to lend these AI companies lots of money to keep building data centres. There is a question about what's the fundamental driver of the earnings.

Yeah, I think the fact that the rise in bond yields hasn't affected the stock market is an interesting point that a lot of people are kind of scratching their heads about, but I think the reason is that the share market is up, not because of valuation, but because of fundamental earnings. The basis of the stock market is the price-earnings ratio which is the ratio of price to the earnings and what happened in the dot-com bubble and other bubbles, what usually happens in those things is the valuation goes up so the price tends to be a higher multiple of the earnings than usual. At the moment, it's the earnings that are up, the PE ratio, the price-earnings ratio, is not up, it's actually not far above the historical average.

Therefore, the rise in bond yields isn't affecting the valuation because the valuation is not what's going on, it's not what it's about at the moment and as you say, it's really a question of to what extent the earnings are sustainable and well, to be honest, nobody really knows do they?

Yes, well, I think it's really important to note again that - I'm picking a hypothetical number - there's a billion dollars being spent on this data centre here in Richmond, Virginia. Now, that flows through to the profits of lots of different companies that are involved in the supply chain of that data centre including Nvidia. But again, is that data centre development being funded by cash flow as it used to be because the big tech companies had such big cash flow? Or is it being funded by debt? The answer is that it's being funded by debt. We're layering debt upon debt at a time when interest rates are rising, it's a very interesting picture.

And a bit scary. Speaking of scary and interesting pictures, Bathla, let's talk about Bathla. It's hard to know what to say about this. The blokes running it have been building these mansions, it's unbelievable. But the apartments that they build are terrible, they're all full of defects. One of the things that has brought Bathla down is the Building Commissions Act in New South Wales which cracked down on building defects and actually required Bathla to either pay a bond of 2 to 3 per cent of the value of the apartments, or take out 10-year insurance. They can't do it.

It's a really interesting situation.

You've been watching it a bit more closely than me, to be honest.

Yeah, for those who don't know, Bathla is a home builder in Western Sydney, it concentrates on the affordable end of the market, house and land packages out in Western Sydney, apartment buildings in Western Sydney. It's been going for a long time but it's really racked up the debt. It's racked up more than $3 billion in debts. Those debts are spread across about 200 projects, some of which are out of the ground, some of which are still bits of land. But it's continued to build this debt over the best part of a decade really.

Is the debt focused on each individual project or is it corporate debt?

The debt is at a project level mainly, there is some debt at the corporate level but the debt is spread across these projects. Mainly what we've seen, the banks don't tend to lend to home builders like this anymore. The incentive for the banks because of the prudential regulator's capital rules, the banks' big incentives are to lend basically to mortgages and so risky lending like this has disappeared from the mainstream banks and that's required the home builders to go to private credit, as has been happening forever, Alan.

I mean, whether it's syndicates of investors getting together to make these loans, the old solicitors' mortgage fund, all that has been subsumed under this title of private credit and private credit has found a very profitable niche lending to home builders, because no one else would want to and that allows them to charge interest rates that ensure good returns for everybody.

Do you know what the rates are that they charge?

Not exactly, but we're talking about the returns that private credit offers tend to be around 10 per cent, so you can imagine the interest rate's higher than that while everyone clips the ticket. So what we've seen is this build-up of debt and that has created problems that really go back for months, but then in more recent times you've seen a couple of things hit, obviously we've had three interest rate rises from the RBA which has dampened demand for homes, we've seen rising construction costs which have been exacerbated by the war in Iran. Michele Bullock consistently calls out construction costs as the biggest flow-on effect because the price of oil goes into the price of everything from PVC piping to diesel that drives the trucks and the machinery on site.

That's been an issue and then the Federal Budget has obviously knocked around sentiment for the housing market. You cannot blame the budget for Bathla's demise, the seeds of this were sown, as they always are in every collapse with too much debt spread across a business that hasn't been set up for it. It's a total mess. I take what you say, Alan, about the quality of these buildings not being up to scratch, but it's also the case that Australia needs home builders building at this cheaper end of the market.

One of the questions out of it is, is it going to be possible for there to be cheaper apartments built that are more affordable for people that are actually up to scratch? New South Wales has now got the strictest rules because I think there was a building in Mascot and another one called the Opal Tower which was scandalous a few years ago, there were investigative journalism pieces on the ABC exposing how terrible they were and all the defects. That has resulted now in New South Wales being the strictest of all the states in terms of building defects. Everyone previously had private inspectors, private contractors doing the inspection, so these developers like Bathla would shop around to get more compliant easier inspectors that let stuff through and now New South Wales has cracked down on that with the Building Commission which does random inspections all the time and other states are sort of scrambling a bit to catch up. Victoria is trying to do it, they haven't got to where New South Wales is and other states are nowhere near it, I think. There's a case, I reckon, for some sort of national approach to - we've got a National Construction Code, but all the states approach it differently, I think it's hopeless actually.

I know what you mean, Alan, but I'm sure you've read the Productivity Commission's recent report on productivity and home building. There's so much regulation and codes and all that sort of thing already. Productivity in home building has been declining for three decades.

Sure, that's right and everyone says, "The National Construction Code is more than 2,000 pages, isn't that terrible?" Andrew Bragg wants to bring it down to 80 pages, but then we'll have buildings starting to fall over. There's a balance to be had here.

There is a balance to be had. Given our struggles with housing supply, what does that tell us about the balance at this stage?

I don't know. I keep getting people writing to us, including into Money Café, saying, "What we need is factory-built houses where they're prefabricated and then taken to site..." And I think that's probably the answer in the long run, but people have known about prefab for ages and it's never really stacked up, for some reason no one can make it work, I don't really understand why that is, do you?

No, I don't, but I don't understand why productivity in home building has fallen 40 per cent over the last 30 years either. We should be getting better at this, not worse. I really would urge people to read that Productivity Commission interim report. The suggestion there is to go the other way, Alan, to free the shackles of regulation and just get stuff built, but you're right, that does come with risk.

I was on the radio the other day, ranting about this to Raph Epstein and they're saying, "As the Productivity Commission said, the National Construction Code was used for social and environmental purposes as opposed to just making buildings decent and safe." For example, one of the big additions to the code was energy efficiency requirements, up from four stars to five to six to seven stars and so on... I was carrying on about this and one of my friends who's in the climate change advocacy area was listening to it and promptly rang me up and said, "What are you talking about? We absolutely have to have energy efficiency in housing, otherwise what's the point? We'll never make the emissions reduction target."

Everything's a balance, isn't it, Alan?

I know, that's right.

Just back to Bathla, I think there's a few things to watch here. One is what happens to private credit? This is an industry that's suddenly been tested by this big collapse, there are going to be some landmines exposed here where private credit firms' disclosure has not been good enough, where their risk management has not been good enough, where they're too concentrated in the property sector broadly and Bathla specifically, so I think there's more to come out there which is not going to be a happy period for private credit. Building more generally - home building's been relatively easy to lend to for private credit when house prices are going up and when construction costs are relatively tame. We've got the opposite now, prices are going down, sentiment is poor, no one wants to buy now because they think they'll get a better deal in six months' time. This is going to be a really testing period for home building and property generally, I think.

Somebody was saying this morning that it's got a bit of a GFC whiff about it and I think it's interesting because private credit is another term for shadow banking, right? It was shadow banks in the GFC that caused the problem.

Totally, Alan, but the flipside of this is we need private credit, we just need it to be done properly, because the banks are not going to lend to home builders. We want somebody to lend to home builders or we'll have even less housing supply.

Yeah, well the reason the banks don't do it is because the capital rules changed to favour mortgages on actual real estate as opposed to lending to business, right?

Yes, that's part of the reason, but I would step back and more broadly say, part of the reason is Australia is a place that has put a lot of value on safety, the safety of our banking sector, safety of those regulations in home building, the Building Code getting out to a thousand pages or whatever it is. We like to think of ourselves as the lucky and have a crack and all this sort of stuff. We have become a nation where safety is put above absolutely everything else.

James, these private credit operators, they're banks too and that part of the banking industry is not safe.

When it's done well it's safe. I think there's a risk here that we sort of demonise private credit and I think private credit, when it's done poorly, deserves to have a very strong light shone on it, but the fact is, the capital rules aren't changing, Alan. APRA is not going to say, "Yep, we agree to make the banking system less safe," in their view - and that is the word they will use. So, there are big parts of the economy that are going to be starved of capital, starved of funding, without private credit. We've got ourselves into this bind, let's get the settings right to make sure that we're doing all this stuff properly.

We better get onto questions. Before we do, I just wanted to let you know that I interviewed Zubin Appoo, the CEO of WiseTech, yesterday for the ABC - this interview will go out on Friday afternoon - and it was interesting. This bloke has taken over from the scandal-ridden Richard White and he's running WiseTech now and it was a kind of interesting discussion about what do you do when you come into a company with a CEO that's hit by scandals and all this having a crisis.

Can't wait to hear that. Zubin is the man in the middle, the meat in the sandwich.

Okay, let's go to questions, before we do that, let's have a quick word from our sponsor.

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And just a reminder that it's general advice, if you need personal advice, please go to see a financial adviser. Woz says, "Love your work, keep it up! I saw Alan's graph on Monday night on the ABC showing student visa approvals running at about 60 per cent off a lower number of applications, down from 90 per cent that we've seen in the past, with politicians in Australia falling over themselves to come up with a number on immigration, it seems with little thought or science to it. I'm reminded of the post-COVID era when we were crying out for more students and other businesses in general to support some industries such as hospitality, et cetera... I've always believed that education was one of our great export earners. How are universities expected to plug the revenue gap if we reduce student visas like this?"

Yes - and he goes on, "It sadly feels like a race to the bottom and all our national political leaders focused firmly on it with no longer-term view beyond the current election cycle." The government didn't announce this or publicise it, except that the data was on the - there's a website called data.gov.au which contains all this stuff and the student visa grant proportion percentage is also published and it's down to 60 per cent and it's been 90 per cent for years, student applications. Also, the application numbers are well down as well.

What's clear, is that the government is using foreign students as a way to achieve the new target for immigration and what's happened is that, in response to One Nation's rise, the prime minister has converted the Treasury forecast for migration this year, which is 225,000, down from 300,000, in the '25-'26 financial year, he's converted that forecast into a target and the number one way they're doing that at this point anyway, is by cutting student visas. Woz is right, this is going to be a big whack for universities. They rely on foreign students to keep the place running, keep their research going because of the fall in government funding of universities.

It is true that in fact foreign students have become the biggest contributor to migration and that's fine, as long as we're building enough housing and infrastructure for them for the resulting increase in migration. But we weren't and so we've got a shortage of housing as a result.

Just to take the other part of Woz's question, perhaps, will we look back on this in 10 to 15 years as a poor decision and rue the lost opportunity, I think that's the interesting part for me here. We've seen America take a very hard line on immigration and very aggressive line with the ICE crackdown. They're now seeing no growth in the labour force, very little population growth... Those things will have longer-term ramifications for America, which it's not easy to see those now. I think Woz has hit on an interesting point. Yes, population growth has created lots of difficulties including housing, as you said, Alan, and clearly immigration has become a hot button politically, but we do have to think about the long term here.

We are an ageing population that needs immigration and population growth. You want to be careful that we don't see a very short-term political reaction to what is a long-term challenge for our society, don't we?

Absolutely. I totally agree that immigration is not only important, that's great. It's really good for the country to have quite a lot of immigration. I think that the flood of immigrants that came in after the pandemic, 500,000 a year was probably too much, but I don't think 300,000 a year is excessive, really, maybe 250,000... Some level of migration is really important and terrific, but what's catching up with us now is the fact that the federal government allowed a lot of immigration for the reasons we talk about, but the states weren't able to or didn't build the housing and the infrastructure to cope with it and it's catching up with everybody now. You can't have it both ways. You can't just have the immigration without doing something about the infrastructure required to house them and deal with it.

That's right. Peter says, "In Alan's weekend review of Saturday the 29^th of August, he stated there is 'no evidence' of people doing it tough. It may not look like people are doing it tough, but we have a K-shaped economy, young renters and young mortgage holders are indeed doing it tough as 50 per cent or more of after-tax income is spent on housing..."

I won't read all of Peter's question but he says, "This is why raising interest rates with today's demographics does not work as well as the economic textbooks will have you believe. A far better way to slow the economy is to use taxes specifically targeting Boomers to crimp their spending, this includes cutting the offsets and other discounts wealthy Baby Boomers receive. Two simple examples are cutting the very generous Commonwealth Seniors Card and the State Seniors Card which provide discounted and free public transport, there's no need for wealthy Boomers to receive this form of middle-class welfare."

I don't think I said there was no evidence of people doing it tough, there clearly is evidence of some people doing it tough, but the aggregate data shows household spending is very strong, is it not? That's correct, right?

Incredibly strong.

Yeah, it's incredibly strong.

I think you and Peter are both right here. At the aggregate level, there is no evidence of people doing it tough, but when you do look at the different cohorts, clearly, people are spending at different rates. Although I would say this, the spending has strengthened across most groups now. I think Peter does hit on a really important point. Interest rates are not working as they once did because there is so much household wealth in Australia. UBS, George Tharenou, the economist there, he's got some great numbers. Yes, okay, we've seen falls in house prices, but at the same time we've seen rising share markets and good superannuation returns.

We haven't seen a hit to Australia's household wealth in the last few quarters, it's basically static at about $19 billion and the RBA is pushing up against that. People can dig into their savings a bit, they can release some of that wealth, they can just keep spending. I think the Reserve Bank's got a real problem here and that's why I reckon there's no doubt we're having at least one more rate rise, because the wall of wealth is just propping up spending and keeping the economy growing a bit faster than the RBA wants it to.

I do think that Peter makes a decent point about the wealthy Baby Boomers, the problem is the people who get hit by rising interest rates are younger people with mortgages. The Baby Boomers like me who haven't got a mortgage are fine. Arguably, there should be some way to crimp the spending of those who don't have a mortgage. Anyway, we're not going to have taxes used to crimp spending and there isn't going to be a fiscal policy renewed in some way. Okay, my turn...

Laurent says, "In your Talking Finance interview with Marcus Padley last week, you said that yourself and Intelligent Investor don't try to time the market, but isn't setting prices to buy, hold and sell trying to time the market? If you're truly in it for the long haul, forget about the analysis, buy a stock, ride the ups and downs and hope it eventually starts to bag." That's what Intelligent Investor does. Me, I'm the world's worst investor. Anyway, the reason I spoke to Marcus is because he's got a fund that's got a bit of money in it and he's 100 per cent cash, he's out of the market.

Wow.

I thought that was interesting and worth asking him why.

What was the answer?

He thinks it's going to fall. In a sense, he's the ultimate market timer, he doesn't go overweight or underweight, he just basically gets out. It was an interesting interview.

That's a strategy but you would have thought there'd be lots of moments in the last few years where it's looked very risky and markets just keep going up.

I know, that's right, but he gets out and then he gets back in and all this, he basically buys ETFs.

Look, the old story, to Laurent's point, is that time in the market is easier, for one, but it's more important than timing the market. Yes, you can try and dodge the bad days, but in doing so you miss the very good days and those very good days are really key to long-term returns. That's the argument for staying in the market, but everyone's different and that's why markets function, because there's lots of different opinions.

That's right.

Alex says, "Quick pushback on the listener who reckons pathology is safe from AI because his pathologist wife won't be replaced any time soon. He's right about specialists but he's looking at the wrong end of the lab. For every pathologist, there are scores of medical scientists and lab techs doing the heavy lifting. A massive chunk of our day is data entry, running analysers and verifying routine results, exactly what AI is built to streamline. As a lab scientist myself, I can tell you this isn't future talk, we're already seeing tenders for new analysers with AI that pre-screens white blood cells and flags leukaemia automatically. The top-tier pathologists might be safe for now, but the bench scientists processing the volume are absolutely prime targets for automation right now." That's a really interesting perspective.

It is. I raised this with Zubin Appoo of WiseTech because they've recently let go of 1,700 people out of 5,500, so a big chunk of their staff, all of them just replaced by AI and he's quite open about it. They've got AI doing stuff in the back office that the 1,700 people used to do and they're not needed anymore. So I said, "What do you think about the prospects for AI replacing a whole bunch of workers and leading to a lot of unemployment?", "Oh no, no, no, it's only us, I think it's going to be fine." I thought, oh yeah, sure...

I just think we don't know and I think my big learning from profit season in the last four weeks, Alan, is that companies don't know either. There's lots of experiments on AI, AI is doing lots of cool things, in some areas it's more advanced than we think. But if you're a big organisation, actually deploying AI means changing a whole bunch of systems and processes that have got decades of history and it's really hard to do. I think we're now in this grind phase of AI deployment, I think it's going to take at least five years. I don't think we're going to see any great impact on the employment market for five years, maybe a little bit of - it'll be tougher for graduates to get a job, but we're starting to see a bit of a swing back towards people saying that AI natives are what they want. I don't know, I think this is going to be a really messy transition and probably takes a bit longer than we think, I don't know.

Yes, indeed. Tristan says, "Love the podcast. What are your usual café coffee orders?" Mine's a double-shot latte and you should say yours James, I know what it is, but you can say it.

It's a hot chocolate...

Exactly!

I'm not ashamed.

You're not a caffeine guy, fair enough. I have your caffeine as well in my double-shot latte. "Real question - I have a new baby boy and my parents are looking at adding money to a piggy bank for him when he's 18 and heading to university, assuming AI hasn't taken all the jobs by then. What's the best way to do that in a low-fee, low-taxation environment, e.g. buying a low-fee ETF sounds great to hand over, but is there something special for this kind of thing with children and long-term views?"

Yes, the answer, Tristan, is it's complicated but there's lots of good resources to help you, including the ETF providers have advice for how to invest for your kids. The big sort of question you'll need to answer, is do you do it in their name, do you do it in the parents' name or someone else's name? That's probably what you want to try and sort out, but there are heaps of resources around to help you. The ATO's got a children's share investment page that you can have a look at. Vanguard's got some information. I'm not recommending Vanguard, I'm just telling you that they've got a page, 'Investing for kids with Vanguard', they're an ETF provider. So there are lots of resources out there and yes, you've hit upon the right thing to think about the tax implications. That's probably as specific as we can get, Alan.

The tax situation, the thing to look at is investment bonds. If you google investment bonds, you'll find that it's a low-tax environment as long as you hold it for 10 years, so a lot of people use these things as a way to invest, the problem with them is the fees tend to be higher. The fees are higher than the ETFs, it's a matter of balancing the fees versus the low tax of investment bonds, whereas with ETFs it's a low fee, but you end up paying tax at the end.

Yes, you'll need to do a bit more research there, Tristan, because it does depend on how you want to structure it, what the tax implications will be. Alright, let's go to Sunday Slam Cardio Tennis, which is an interesting name, but we welcome you as a listener, "I write this as a frustrated Myer shareholder, realising that every company and situation is different. I do wonder, to what extent is a company's share price impacted by the market sentiment towards a given sector. My only consolation in seeing the Myer share price fall from $1.30 to 20 cents is that most others in the sector have suffered similar falls. I live in hope that a change in market sentiment will occur and retail will have its time in the sun again. Perhaps if there's a fallout in the AI tech sector, this will happen, what do you think? Please discuss."

I do think the markets are understandably sceptical about department stores, I think department stores may have had their day. You walk into Myer, it's a massive store, but do people go into Myer or David Jones these days to buy TVs or appliances, as they used to? No, they go to JB Hi-Fi. I just think Myer and David Jones stores are too big. Basically, they're clothing shops now and they need to be about a third of the size.

I think our listener's got two issues with Myer. Olivia Wirth is the executive chairman with the backing of Sol Lew. They're throwing a lot at this to turn it around and I think they're actually doing a reasonable job in trying circumstances. They've got their online sales going pretty well, their loyalty program at Myer is extremely strong. You've got sort of two factors working against you, one, is as you said, Alan, the department store issue, it's a challenge for department stores not just in Australia, but right around the world. Then you've got at the moment, this concern around discretionary retail and consumer spending, which is weighing on everyone in the retail sector. Yes, maybe there is eventually a rotation away from tech and AI that helps the retailers, but it's a hard road back. I think Myer needs the economy to turn and they'll need to keep right-sizing their business to make this work. There's probably a future that Myer's online marketplace model has gone pretty well, perhaps there's a future in that. The combination of online sales and physical sales, that's actually working reasonably well for many retailers, so it's not without hope, but it's a long road back, that's for sure.

That's right, they're stuck in these long-term leases, 15 to 20-year leases which they can't get out of.

Yeah. Do you want to find us one to finish with, Alan?

Yes, alright. Carl - "I'm a long-time listener. While I realise this will probably increase the fiction section of most companies' annual reports, would you both like to comment on whether the underlying profit section of the report should also report an underlying dividend?"

This is a great question, Carl, and having just sat through four weeks of reporting season, the breadth of profits which a single company can deliver is extraordinary. Often we'll see statutory profit which includes absolutely everything, an underlying profit figure which takes out bits that the company argues are one-offs and then we might see different versions of underlying profit, underlying EBIT, underlying EBITDA, normalised, pro forma... There's all sorts of profits. I think a couple of things, underlying profit is a reasonable way to get an oranges for oranges comparison, how did the business look this year compared to last year? But you do have to be very careful about what companies leave in and leave out.

Using the statutory profit is important because that's what investors get at the end of the day. There's often this thing that companies have to include in their statutory profit, non-cash write-downs. Say, Alan and I are running a public company, we go buy a business, it doesn't go well, we paid $100 million for the business, we now think it's worth $80 million so we write down the value of the business by $20 million. Now, we tell you, dear shareholder, that is a non-cash adjustment, but the $100 million we spent on the business, that was real cash.

So you do have to be careful about all these adjustments and the justifications companies use for consigning things to the dustbin of the past. There's no real way around this, Carl. You need underlying profit and you need net profit or statutory profit. It does turn investors into detectives sometimes, that's for sure.

Do you think that accountants and auditors and the regulator have lost control a bit of what's going on? You're right, there's just an unbelievable array of profits. The job of accountants is to tell us what's going on.

Yeah, I actually think auditors and accountants are trying to do the right thing because they're trying to provide a picture of the business that is realistic and shows how it's changing. But in doing so, they've sort of contorted profit and earnings into all these different forms. To Carl's point, there's a fictional element to some of it sometimes. I think their intent is right, but what we end up with is a bit of a soup of earnings which needs to be pulled apart and it's not always easy or not easy enough.

Okay, very good. What an excellent bunch of questions this week.

Thank you, listeners.

Thank you. I think we had 16 pages of questions so we couldn't possibly get to them all but it was great to get them all and keep them coming. Next week, I'll be back with Stephen Mayne, send in your question for us to themoneycafe@intelligentinvestor.com.au. Until then, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter, Columnist and Podcaster for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

See you soon.

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Got a question for next week? Please send it to themoneycafe@intelligentinvestor.com.au.