Refined chaos

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[Music]

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

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

And we are...

The Money Café.

The Money Café. G'day, James, welcome back from your holiday, where'd you go?

I went to Japan, had a great time, two weeks with the family, did a few different things, went to the west of the country and did a bike ride, actually, for two days, called the Shimanami Kaido, about 70 k's so not too bad, but you go over six big bridges that link up six little islands in the inland sea of Japan, it was great fun. First day, absolutely torrential rain which tested the meddle of the touring party, but second day, beautiful sunshine and it was great fun. It was good to get out of the city.

I didn't know they've got an inland sea.

Yeah, it's beautiful and this bike ride, we had electric assisted bikes because to get up to these bridges there's some gnarly hills and you just woosh on up there so even our 11-year old was happy to jump on the bike and handle it all really well, so it was great fun.

As soon as you get back, the Geelong oil refinery burst into flames.

[Laughs] Nothing to do with me, I assure the listeners. But, man, in business and in comedy, timing is everything and wow, the timing here is awful, isn't it?

It's terrible. Are you writing about that today?

No, I'm not. I'm not officially back at work, but I'm joining the Money Café listeners... But I have been watching it this morning, it looks like just a really unfortunate accident at exactly the wrong time. It's going to reduce production at exactly the wrong time. I know you had some good graphics this week about the flotilla, the armada of tankers heading our way.

Yeah, but they're all carrying diesel. There's six boats coming from America with diesel, one of them landed in Newcastle yesterday or the day before, there's five more that are coming over the next couple of weeks and I'm pretty sure they've all got diesel onboard and the problem with the Geelong refinery is it makes petrol and I think it supplies 10 per cent of the country's petrol, suddenly that's 10 per cent not there anymore because the thing's offline. Nobody knows how long it's going to be offline for.

From what Viva's saying today, it's going to be offline for some period although there's some limited production still going on. I gather aviation gas for smaller aircraft has been particularly hit. That's probably another issue for rural and regional communities. Alan, my sense of that armada though, is that sort of what the Government's been able to work pretty quickly to sort of pull together in the immediate response to the crisis. But I think what we sort of keep forgetting here, is there's not a whole lot of oil still getting out through the Strait of Hormuz. I mean, we've sort of - have we played the emergency card and now we start to settle down into the sort of grind of this oil crisis.

It's worth bearing in mind that the diesel price has gone up twice as much as the petrol price. The diesel price yesterday was $3.18 or $3.20 a litre and petrol is still in the low $2s. The reason that diesel has gone up so much is that the refineries in Asia, in Singapore, Malaysia and Korea in particular that we get the stuff from mainly, they need to get oil from the Persian Gulf because that's the grade of oil that you need to make diesel. The oil that they get from North Sea and America is good for petrol, but the diesel is now in short supply because obviously no ships are getting out of the Persian Gulf. There's a real shortage now developing of diesel.

Now, as to how come all these ships have got diesel on them coming from America, I don't know, I mean, presumably they're obviously making diesel in the US as well, but those Asian refineries that we get the diesel from are running out and they're about to - I think in the next few days, maybe in a week, the oil that they have already got, that's been delivered already and is in ships that are on the way there, will run out. They will very soon just completely run out unless the Strait of Hormuz opens up again, they'll run out of diesel.

What's going on is that Anthony Albanese is going around to these places, Brunei, Singapore, Malaysia and so on and he's offering them secure gas in return for secure diesel. The thing to bear in mind, of course, is that Albanese and the Government don't own the gas, so they can't promise it. All he can do, which is what he's doing, is promise that he won't stop it, you know what I mean?

He won't impose export controls, yeah.

Yeah, so he won't stop it and that's kind of all that the Prime Minister of Singapore can do as well, because he doesn't own the fuel either. I mean, they're all private businesses.

It's been quite amazing this week, Alan. I've just been watching the stock exchange announcements seeing a series of - well, their profit warnings, obviously from the airlines that's not a big surprise. But even we saw Westpac sort of warn that this is probably the inflationary pressure here, the cost of living crunch is not going to be good for our loan book. We've seen a smattering of other industrial companies warn about, okay, we're now into the pain part of this and yet, markets just keep going, particularly in America. Does something feel disconnected to you or is this just where we are?

No, it does feel disconnected to me, I was up late last night writing my views on this for the Weekend Briefing and I think that to some extent, the markets have decided that the war is basically over, there's just got to be some shouting at each other across the negotiating table, but basically it's over. The markets are kind of looking ahead towards it being all right. Now, obviously that's a big call.

Markets do always, in theory, look 12 months ahead. I guess you can think about that. The earnings outlook is still very good in the US particularly, but most of that's been driven by technology stocks that are largely unaffected by this, I mean I think we're looking at - I saw some numbers last night, the profit growth in the old economy is running at about 7-8 per cent in the next 12 months in the "new economy". It's running more like 30 to 40 per cent. That new economy part of the market certainly powers everything along, so you can understand that. You can understand that perhaps stocks are a better bet than bonds at the moment because bond yields are going up which pushes prices down. But the average punter out there, whether they're in Australia or the US, they're about to hit this sort of stagflationary flat spot that's not going to be very nice.

Something doesn't quite feel right to me or maybe this is just yet another example of financial markets are not the real economy, they are a sort of bubble on their own and the bubble wants to inflate.

I think there's a binary kind of thing going on here. My friend, Gerard Minack, put out a note this week in which he said, part of the reason, if not the main reason, that markets are still up - in fact, the S&P 500 and the Nasdaq have both regained their previous peaks - is because of earnings upgrades, mainly with energy stocks which obviously is because of the increase in the price of oil and gas because they're making a lot more money and also technology. The technology stocks are being upgraded, their earnings are being upgraded as well and all of that's fine as long as there's not a recession. So then I looked at what's the odds of a recession and the answer is around about 30 per cent, 35 per cent chances of global recession, which is obviously not zero, but it's not 50 per cent, it's not more likely than not.

I think the markets are basically saying, there's not going to be a recession, earnings are going fine for tech and energy stocks, so we're okay. The other thing that's going on, is the Wall Street Banks are making an absolute motza because of the volatility. I mean, Goldman Sachs and JP Morgan and these banks, they're reporting huge quarterly profits now from equities trading and commodity trading, because they all make so much money when there's volatility, which there is.

The other thing I think that's going on with the markets is - I've been reading a few investment strategists on this subject - there's a big difference between the behaviour of Donald Trump and what's going on underneath in the White House. There's a bunch of characters in the White House who are - I don't know what you'd call them, they're serious people, the main one being a fellow called Elbridge Colby, who is the Under Secretary of War for Defence Policy. He's the guy who wrote America's National Security Strategy which was published last November and it laid out the whole kind of contest with China and that it's all about China.

I've been reading some strategists who kind of say, what's going on both in Venezuela and now Iran is the implementation of that strategy. The serious people in the White House are basically doing that, led by Elbridge Colby and they're kind of putting this plan that was laid out in the strategy document in November, putting this plan into practice and they're doing it methodically. Meanwhile, Trump is posting on Truth Social at the rate of 50 to 60 posts a day, right? He's gone mad with posting about the Pope and putting up things about Giorgia Meloni, the PM of Italy, and also pictures of himself looking like Jesus and all this...

What's happening, is the media and politicians are all focusing on Trump, which is understandable and he's gone crazy and he's all over the place and everyone's going, "This is mad, this is chaotic..." everything's chaotic in the US, nobody knows what's going on, the US has no strategy and this is because if you look at Trump, that's what it looks like, but in fact, there is a strategy and it's quite serious and it's being methodically implemented. There's a bit of that going on with the markets as well.

Yeah, I struggle with that sort of over-arching grand strategy thing, because the basic idea is that America needs to be more self-sufficient, Trump's gone a long way away from America first, but that White House click, their view is that America needs to be able to defend itself more stridently than in the past and it needs to have better energy security and better manufacturing capacity. Those are key to security of the country, military security and key to economic security. I get that idea, certainly, but I just wonder if people sort of start to - what I've seen with the twists and turns of Iran, it's a bit of a choose your own adventure. Whatever you think about the world and Trump, you can make the facts fit what's happened.

We've seen capitulations and deals and ceasefires and then new waves of aggression, now this blockade of the Strait of Hormuz, which was never closed before and Trump wanted it opened, he's now closed it himself. Does this really speak to grand strategy? I'm not sure. The thing that speaks to me is, everybody's going to be spending a lot more on defence, everybody's going to be spending a lot more on their own energy security over the next two decades. That might be good for markets because fiscal stimulus is generally good for markets, but it's also going to put pressure on inflation and keep interest rates up and that might tell on markets at some stage, because that's happening in a world that is awash with debt. So, I can see the grand strategy, but I don't think the grand strategy is an automatic winner for markets.

No, no, I agree.

Let's remember what markets are pricing here, they're pricing no recession, no interest rate hikes, no stagflation, nothing bad happening for the next five years. How likely do you feel that is at the moment? I don't know.

It's already incorrect.

[Laughs] It's already incorrect, that's right. It's a fascinating time, isn't it?

Before we get onto questions, Gina Rinehart's loss in the court, is she going to have to put the hat around now? Is she going to go broke or what?

I'm not sure it was a loss, Alan. I think certainly there's going to be some payment made from the Rinehart side to the Wright side and so this Peter Wright, who was Lang Hancock's school friend and business partner. The Wright Family sued the Rinehart/Hancock Family, demanding royalties for iron ore sales that had been made over the last few decades and a big equity stake in some of the iron ore mines that the Rinehart's control. The Wright Family, they won on the royalties part, but they lost on the equity stake part and that's the one that would have been really expensive for Gina. She's counting this as a win and I'm sort of inclined to agree with that to a certain extent.

She's still going to have to pay hundreds of millions in royalty, it appears. But I think this is all about control and control over long periods of time. I think Gina Rinehart's control over these very valuable iron ore tenements is maintained. I think she's probably the winner after years of legal wrangling, which I guess mean the real winners of course are the lawyers, as always.

Oh yeah, absolutely, that's right.

But yeah, it's fascinating. This feud particularly has gone for decades and that's because of the huge amounts of value at stake. We forget how much iron ore revenue has been created and how much wealth has been created, how much tax and royalties have been paid. It's still a hugely important business and really valuable. What a fight...

Before we get to this week's questions, here's a quick word from our sponsor.

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Also, before the questions, remember this is general advice only, in particular it's not personal advice because we can't do that. Just bear that in mind and first question's from Rosemary, "I'd love to hear your thoughts on the economics of the NDIS. We keep hearing the NDIS is too expensive, but if it's supporting people to work and participate in the community while also creating jobs, shouldn't we be looking at the return on investment? If it's contributing to a higher workforce participation and generating more taxable income, is there a risk that cutting it could actually make the economy worse?" You go first, what do you think, James?

I think that Rosemary makes a good point, that you do need to think about the economics of the NDIS holistically and I guess the challenge with healthcare jobs more specifically is that they don't tend to grow the economic pie, they tend to maintain the economic pie. So, while healthcare workers work harder than almost any group of people in society, the productivity of those jobs as measured by output isn't seen as high as some other sectors. Yes, I think Rosemary makes a good point that Government spending through healthcare and particularly the NDIS has been pretty important to keeping Australia's economy ticking over along with population growth in the past few years.

So, yeah, we probably do want to be careful about how quickly you brought that spending down, but I guess, Rosemary, we're just trying to spend on so many things at the moment. Healthcare, NDIS, aged care, defence, education... We just can't have everything, so we need to be able to make these programs work super efficiently, as efficiently as they can, and get the best bang for our buck out of these programs. That's the goal here, I think, Alan, with NDIS, we just want to help as many people as possible and for that to happen, you want the program to work super efficiently. I think there's no doubt that it's not working efficiently and effectively at the moment.

When I interviewed Jim Chalmers a couple of weeks ago for the ABC, I put to him that the fact that the NDIS is costing far more than expected, doesn't that by definition mean that it was poorly designed, or at least it was designed in such a way that it's doing things that they didn't expect? It's costing more than they expected, so therefore they need to adjust the design back to what it ought to be. Anyway, he didn't answer that of course, but I think it seems to me by definition, it's problematic, it needs to be thought about. The thing is, Rosemary's right, it's providing two benefits. One, is it's obviously supporting and helping disabled people, but also it's providing an economic benefit by injecting money into the economy through jobs and so on, income for businesses that are NDIS focused businesses.

But on the other side of that, it's weighing on the budget and also, it's tending to operate against what the Reserve Bank is trying to achieve at the moment which is slow things down. The NDIS is itself an economic stimulus at the wrong time.

Yeah, as I think we keep saying, great program that we want, the nation wants the NDIS to work as well as it can, we want it to be as waste-free as possible so the spending that we do allocate to it gets the biggest bang for its buck. I mean, it helps the most people possible in the best possible ways. I think that's the crux of it and it just feels like there's too much waste, it's not working effectively. You hear some crazy stories about the rorting and overcharging, that doesn't help the people who need that money the most. I think it's something that, to your point on the design, Alan, this is not something that's been tried, it's a new concept. I don't think we should be afraid - I don't know if afraid is the right word - or unwilling to keep tweaking it until it looks right and that may take 30 years. There's lots of big national programs that need constant tweaking.

I agree, that's what they need to do, they need to tweak it.

David says, "I'm sure you're familiar with David Pocock and his work to establish a Senate Inquiry into gas exports. What are the practical and political elements preventing this policy from taking hold? It seems a win-win for Australia at a policy level, the only losers being those with direct or vested interests."

I'm presuming David's surname is not Pocock?

Yes, mere coincidence.

Well, the main practical and political thing preventing this policy from taking hold is that the gas companies will complain. There'll be a sovereign risk element. What would be happening, is that the gas companies would be sitting in front of the Prime Minister and anyone else in Canberra that they can get hold of and say, "If you do this, there'll be a big decline in investment in Australia and do you really want that?"

Yeah, if you change the rules on us...

If you change the rules, everyone's got to pull out and it'll be terrible and all this... The problem with a lot of this kind of policy stuff, is that the people who are against it, like in the gas companies, there's only a few of them, they've got a lot of money and they're powerful, so they get a meeting with the Prime Minister or whoever and they're able to employ lobbyists. The people who benefit from such a thing is everybody else in the country. We, the other taxpayers, don't really have the ability to employ lobbyists, you know what I mean? There's an asymmetry in loudness of voice, it seems to me, would you agree with that?

Yes, of course there is. Just generally, it's probably not a bad time for us to have a holistic review of energy policy in this country and taxation settings. The issues of energy security, we've got a few questions on this in our lot here, coming back to our point about the US strategic view of the world, this is only going to become more important over the next couple of decades and so, how we think about energy in the country, of all types, is probably worth a bigger picture review. That would include tax settings. Also, as we're seeing at the moment, given we don't have a whole lot of oil production and oil refining capacity, our status as an energy exporter has actually been pretty helpful in the last six weeks. Some of those considerations might come into play too. Maybe it is time for a bit of a holistic look at this.

Yeah, well we had one with the Ken Henry Review of taxation policy and he recommended some extra resources taxes, which the Rudd Government tried to do and famously failed.

Yeah and that is the problem with big picture reviews in this country, we never seem to like the answers all that much.

Ben says, "I'm a big fan of the show and the Kohler dynasty. More broadly, I'd like to hear how you guys manage the emotional side of investing, in particular selling dud performers and crystallising your losses? For context, I've been talking to Gemini about some portfolio advice for my shares. After much back and forth, it recommended selling my crumbling stake in FBR, which stands for Fast Brick Robotics, and paying down my margin loan..." Now, listen, Ben, we can't give personal advice, Gemini might be able to, but we're not going to tell you what to do with your shares. However, I don't think one should have margin loans to buy speculative stocks, I don't think that's a very good idea.

The thing that stands out to me with your holding in FBR is the margin loan. I don't know whether this stock's going to do any good or not in the long term. I think the idea of having a robot lay bricks is interesting, but it's long-term. Where this company's going, what they've got and the core of their technology, is the ability to have a really long arm that will hold fairly stuff, i.e. bricks, and be stable. What they're now doing is selling that technology to other possible uses apart from laying bricks, such as unloading ships and so on. I think they might have even sold one of these machines to the port in Darwin.

That might work out and I don't know, but that's the decision you have to make. But I reckon if you've got a margin loan - you can invest in something like FBR for the long-term and maybe they'll come good and maybe they won't, who knows? As long as you haven't got a loan against it, crikey.

I'm just going to step back from this a bit. Ben's asked us about advice on managing the emotional side of investing, he's gone to Gemini to ask for that advice, AI built on nothing more than the data it's ingested. He doesn't like the answer that Gemini's given him because it's too cold and practical and he wants us to tell him that everything's okay, I think, and he should just continue doing what he wants to do, which is, his view is that the opportunity cost of holding this stake, being the interest on the margin loan, is so much less than the potential to get your money back. Ben, I think your answer is in the question itself.

Yep, I totally agree.

I've got huge question marks over taking advice from Gemini about this, but I would suggest that you've been given some advice and you don't like it. You do have to think rationally about these things and to your point, Alan, if you just bought these stocks outright, without the margin loan, maybe you could cop the opportunity cost of holding onto them, because it would be a lot less than it is now for you, Ben, with the margin loan sitting there. I don't know, you've encapsulated your problem very nicely.

He's paying 9.65 per cent for the margin loan, crikey.

Stuart says, "Why are we still quoting the price of brent and West Texas intermediate oil on the news every night, when the majority of our diesel which powers the entire Australian economy comes out of South East Asia, whose oil in turn is sourced predominantly from the Persian Gulf? Why aren't we quoting the Singapore Gasoil 10 ppm benchmark?" Yeah, Alan...

Well, because those numbers are hard to get. Those numbers are owned by somebody and they don't let you know, whereas you get brent and West Texas on Bloomberg or wherever, they're just widely available. They're the main benchmarks, so that's what we quote. I would quote Singapore Gasoil - Gasoil, by the way, is diesel - I would quote that if I could find it, but I can't.

But I think, Stuart, there's still value in quoting brent and West Texas because those benchmarks are well established, there's a lot of history to them, so we can follow the ups and downs of them and ultimately they do feed through, as Stuart's pointed out, they do feed through to the Singaporean refined prices anyway. And yes, sure, the Singaporean prices are moving a lot more, but that point's been made repeatedly and frequently as well. I think there's value in historic benchmarks, because it tells the story, it helps explain things over a long period of time, it puts things in the historical context as well as the current context, I reckon that's really important.

Debra says, "I read your interview with Paul Schroder about the Australian dream, I was shocked by his grave concern about housing. I have attached a link that tells me there are 3,200 empty dwellings in the Clarence Valley, plus 800 Airbnb's. I don't believe we have a supply issue, it is the usage and investment issue controlled by Government policies that is denying our young kids access to the Australian area. This feels more like misinformation war to influence hate against immigrants who are being blamed for the housing supply shortage. The Australian Institute has been recently coming out saying that there is no supply shortage either." Do you know where the Clarence Valley is?

No, I don't.

Hang on, I'm just Google-mapping to see if I can find out where it is, because I presume all these houses are holiday houses. Clarence Valley, New South Wales, it's in the kind of hinterland of the mid-north/central coast. These are presumably holiday houses or something. Sure, there's a lot of holiday houses that are empty most of the time and the people go there on the weekends or something, I don't know. But what's the Government going to do, pass a law saying you have to let people live in your holiday house? I mean, I think a lot of this stuff is a bit spurious about these empty houses.

Yeah, Victoria has tried that, increasing land taxes on second residences and things like that, it hasn't made a huge difference to prices or supply.

Yeah, and a whole lot of people who've owned a holiday house have sold them or tried to sell them and can't because there's too many on the market. So, is there a supply issue? I've been reading the Australia Institute's stuff saying that there's no supply shortage and I think, okay, the fact that house prices have been, for 25 years, rising at twice the rate of CPI inflation, more than twice the rate of wages, tells you that there's a supply/demand problem. There is clearly a shortage of housing. Whether you attack that by increasing supply or by reducing demand, kind of doesn't matter, it seems to me. Immigration clearly is higher than it used to be. It's coming down now but it has been very high, you know? To state that as a fact, is that blaming immigrants for the housing affordability? Of course not, it's just simply a matter of numbers.

If the Governments can come up with enough housing to meet the demand, fine, that will be great, but I actually don't think they can and I don't think anyone's going to pass a law that says all empty houses have to be made available for people who want to live there, I don't think that's ever going to happen. We can fulminate about holiday houses and empty houses and Airbnb's all we like, but nothing's going to be done about it.

All right, another property question from Dylan, he says, "Regarding grandfathering of the CGT discount, doesn't grandfathering just create more intergenerational inequality? Existing investors will always have an advantage over new and young investors further, couldn't this create a lock-in effect where nobody sells their grandfathered assets, further drying up housing supply. Shouldn't housing carry risk, like the risk of tax reform, like any other investment? I understand politically that grandfathering will be unpopular for investors, but surely that is not enough to further put back young Australians."

Dylan's absolutely right, but what are you going to do?

I'm not sure Dylan's absolutely right. Yes, housing should carry risk like other forms of investment. When we've had suggestions of changes to taxation of other forms of investment, there either has been grandfathering or there's been deep protests against that. You buy an asset under one set of rules, are you entitled to think that those rules should continue? Probably.

Yeah, I think so.

I think the issue we've got is because the scale of property investment in the country is so big, that grandfathering is going to capture a lot of people, but will it lock those properties in? I'm not sure. If you ask someone like Evan Thornley, who used to be a tech entrepreneur, then a politician and now has a property business, he reckons most people get their property investments wrong and don't make any money out of them or make very little money out of them anyway. So, whether it locks up property investment, I'm not sure. Tough one. I think we need to make a start, Dylan, on the change. Reducing the CGT discount, maybe it's not perfect, but it's not nothing and we need to start somewhere with this.

What I was about him being right, I think he's right that it will worsen inequality to some extent, but again, I think it's really difficult for the Government not to grandfather...

Worsen inequality? It'll be worse than it would be now?

Well, people who have got grandfathered properties because they've owned them a while, will make more out of them eventually than those who buy now, who are by definition, younger, I guess. That's kind of the problem.

Just while we're on this topic of inequality, Alan, I'm going to flick to one of the questions right down the bottom, mainly because I actually did some numbers on it and the question is from Philip, who says, "He finds it hard to understand the concept of intergenerational inequality..." and I think this is a good point a lot of people make. He says, "He bought his first home in 1974 with a 30 per cent deposit he'd saved on a single income, no childcare subsidies, no second salaries, interest rates that would make today's borrowers faint. He didn't eat out, didn't travel and drove the same car for 11 years. No one called that a structural injustice, we just called it getting on with things. So, when economists and politicians talk about intergenerational inequality, I'd like someone to define it with precision. Are we describing a general structural failure in housing supply and wage growth, or are we dressing up a preference for consumption now as a policy emergency?"

I'll just use Philip's numbers there. In 1974, the average annual salary or median salary, was $7,600, but the average median house was about $25,000 bucks, so 3.3 times the average median salary. Today, the average median salary is $74,000, the average median house nationally is $1.17 million, which is 15.8 times the median salary. So, Alan, I'm sure there's a more technical definition of intergenerational inequality, but to me that sort of sums it up to some extent. In Philip's generation, a house was worth 3.3 times the average person's annual wage. Today, it's 15.8 times. Philip's generation, buying a house was possible. In the current generation, for the average annual salary holder, it's very, very, very difficult. One generation could do it, the other can't.

I think you put your finger right on the problem. That is almost the beginning and end of the whole problem, which is the change in the relationship between house prices and incomes, which has completely changed, it's increased four or five times. That means that a house that now costs a million dollars should really be costing $300,000. Think about that. I say that to people... Look at somebody who've just paid $1 million dollars for a house or $1.5 million and they've got a million dollar mortgage and they're really struggling, that house should really have cost them $300,000 or something. That changes everything. That thing that you just talked about has changed everything about Australia.

Yeah. I think it's really important to say, no one's taking a shot at Philip's generation. They played the cards they dealt with, they made lots of sacrifices, as Philip explains, but now even if you make all those sacrifices, it's just not possible. The numbers don't add up, the maths doesn't work. You couldn't drive the same car for 11 years and then at the end of that 11^th year, miraculously you'd have enough money for a house. No one's saying that Philip's generation did anything wrong, but back then it was just entirely different. You can throw lots of other things in. People in Philip's generation enjoyed a long, long period of falling rates and rising asset pries in all parts of the economy. Look at what the share market's done, superannuation, obviously that involves sacrifice as well, has been a huge beneficiary to wealth. But I think it just boils down to that idea. One generation, buying a house was possible on a single income, now it is completely impossible. That's it.

We've got time for one more question, this one's from OG Listener, Ali, "As an Australian born Iranian, I have a bad feeling that the effects of this war on Australia are permanent and likely to get worse. I'm too young to know how the last oil shock affected the country. Do you have any practical advice on how to prepare for the economy we're living in now and what this new normal will actually look like?" Yes, well the last oil shock was at the time of the Iranian revolution in 1979 and it's interesting because what I think happened then - and I was around at the time - is that OPEC used the cover of the Iranian revolution to double prices and I think prices increased from $20 to $40 dollars a barrel or something.

The Iranian revolution didn't actually cause a decline in output. The Ayatollah kept Iranian production and exports going so there wasn't actually a change. The only time there was a change was before the Ayatollah took over in December 1978, there was a general strike in Iran of people protesting against the Shah and that resulted in a big drop in output from Iran. But by the time the Shah left in January of '79, Iranian production was back to normal.

So, actually what happened in '79 was not the sort of thing we're seeing now and that's why the international energy agency is saying that this is the worst oil shock in history, because the shutdown of production caused by the blockade of the Strait of Hormuz, is 20 per cent of the world's supply, which is more than was shutdown back in the 70s, whether it was '73 or '79. Practical advice on how to prepare for the economy? What do you think, James, have you got any?

I don't. I have been thinking about this question and I think, so far, there hasn't been a whole lot of behavioural change at all and I think when we left two weeks ago to go on holidays, fuel prices were a lot higher than they are now, of course, because the fuel excise has been cut. So we've really been allowed to make basically no changes. But we could see, we are likely to see, in the back half of this year, a period of stagflation where growth is pretty crappy and inflation is pretty high. That's a pretty fragile economic state. Alan referred earlier to the chances of a recession, 30 per cent, that's not nothing, that's a one in three chance of recession. If a recession hits and we see a spike in unemployment, my fear would be that we just haven't seen a recession in decades, Alan. Australia's uniquely unprepared for anything like that. I don't have any practical solutions but it's just an interesting thing to think about.

I spoke to Luci Ellis yesterday, who's the Chief Economist at Westpac, used to be the Head Economist at the Reserve Bank and she's predicting three more rate hikes this year, we've already had two, that would make five hikes in the course of 12 months. She's an outlier, she's the only one predicting three, I think there's quite a few predicting two. If she's right - and I wouldn't bet against her to be honest - but anyway, if she's right and there's three more rate hikes, I think there's a fair chance of a recession in Australia. Basically, she seems to be saying that in order to control inflation, particularly since the war has been going on, the Reserve Bank will have to cause a recession to happen in Australia.

Then, Alan, just to throw in another little wildcard, if we had a recession, they're not good for employment but could you see that speed up the adoption of AI as companies try and cut costs and protect profit margins. I think that's the other thing, we've sort of forgotten a little bit about AI over the last six weeks, but it's march continues, it's an interesting little moment.

It more than continues. The development of AI remains exponential, I mean they're just getting better and better all the time, it's incredible. I looked at a website the other day that is an AI agent shop and they've got a thousand agents that you can just buy off the shelf that do stuff for your business.

There wasn't a podcast co-host agent, was there?

Well there will be if there isn't now.

[Laughs]

Yeah, basically everything that you've got human beings in your business doing, you can buy an agent for that will do it instead.

Fascinating.

Okay, thanks everyone for listening to today's episode of Money Café. I'll be back next week with Stephen Mayne. Send in your question and we'll try to get to it - we got a lot more questions today than we were able to answer, sorry about that, but we're not one of these three-hour podcasts, not yet, anyway. Email us at themoneycafe@intelligentinvestor.com.au. Until then, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter and Columnist for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Financial Review, talk to you soon.

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