Expert: Andrew Brown – A look back at 2022

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you going? 

Alec: [00:00:29] I'm very good. Bryce. It is the week of Christmas, its last recording of the year. Everyone's a little bit tired. This is going to be a loose episode. 

Bryce: [00:00:38] This is going to be good.

Alec: [00:00:39] Yes. We've got our very first expert back all the way back in 2017 joining us again. I would assume the most featured guest on Equity Mates. Yeah, by far we haven't done the tally, but I think you've got the title. Andrew Brown. 

Andrew: [00:00:52] Thank you very much, Ren. And good morning, Bryce. 

Bryce: [00:00:55] Morning, Andrew. So you're here, what is now an Equity Mates tradition to wrap up the bold predictions that you made at the start of 2023 now. 

Alec: [00:01:06] So the 2022. 

Bryce: [00:01:07] Sorry, sorry, start of 2022. 

Alec: [00:01:09] We didn't warn. It's going to be a loose episode. 

Bryce: [00:01:11] That Alec and I did our wrap on Monday. And boy, were we bullish. We had a few. More than a few. Sorry. 

Andrew: [00:01:20] Were you wrong? 

Bryce: [00:01:21] Yes. Boy, we were wrong.

Alec: [00:01:22] I was also bullish about the Sydney Swans making the AFL grand final, so we weren't complaining at all. I was also bullish about Australia. Winning gold at the Winter Olympics wasn't completely wrong. But all right. So wrong about our finance position. That's right. Yes. 

Bryce: [00:01:37] So, Andrew, today we've got 14 of your predictions. I think more just general commentary. Yeah, yeah. And we're going to go through some of them in detail. Others we will we will review. 

Andrew: [00:01:50] I'm going to say ten out of 14. 

Alec: [00:01:52] All the bells will be judging. 

Bryce: [00:01:56] All right, Andrew, so we've clipped all of your comments from start of the year. Let's jump into the first, which really does put a nice bow on where our at. But let's have a listen. 

Andrew: [00:02:07] There's a good chance inflation ain't going to go much higher. I'm not saying it's peach, but it may not go much higher. It might not come down quickly. But this may be the sort of the yet that interest rates haven't caught up with inflation yet. And so what's going to happen over the course of the year is that long term bond yields will rise, in my opinion, and probably have a three in front of them at some stage. Short term interest rates are going to rise because the Federal Reserve is going to push them up anyway. And as the Federal Reserve withdraws from buying government securities, which of course pushes their price up and keeps their yields down, then the demand for government securities that yield next to nothing by anyone else on the planet is pretty, pretty small. So that yields are going to rise and they're going to rise a little bit in Europe. They're going to rise in Australia as well, despite all the Reserve Bank think. And so we're going to have a situation where interest rates are not going to normalise, but they're going to start on a pathway to normalising. 

Alec: [00:03:06] I feel pretty good about that. Yeah.

Andrew: [00:03:08] I think I mean, in essence, that is what has happened. Yeah. For those of you who wonder the inflation rate in December 2021 in the US was 7%, it's currently 7.1 and it's been to what, 7.8 I think. Penny, on how you measure it in terms of course core CPI has been nowhere near that, but obviously the total CPI has. So in fact I think what I said was was pretty much spot on. The inflation basically had reached its peak, but it wasn't going to come down quickly. And that's exactly what's happened. 

Alec: [00:03:39] I think we got I think we got up to 9.1 in July. Yeah. But like, yeah, yeah, seven and now seven and. 

Andrew: [00:03:46] That's that seven again. And I think the reaction to that can't have been a surprise, which is that bond rates have gone up. But in fact, of course over the past few months they've actually come down in the US as well. So the ten year bond yield in the US peaked at four and a quarter in October at a time was speaking. It's about three and a half. 

Alec: [00:04:07] So you said it would have a three in front.

Andrew: [00:04:09] Three and it's got a three and short term rates obviously will catch up. Well, the mid-point of the Fed funds rate is is 4.38 per at the top end of it's four and a half. So that's categorically caught up because I think it's higher speaking. I think the Fed funds rate was one. So I think that's that side of things I think is important. The way I tried to break inflation down, not necessarily in the broadcast, was was demand pool, which is basically lots of people want to spend lots of money. Yeah, that's happened and probably peaked cost push. That's definitely peaked. Yeah, that was container freight prices and all those kind of good things. The supply chain that's peaked and then inflation expectations and they've probably peaked as well.But that's less convincing than the other two. 

Alec: [00:05:02] Well I think we price has written in our Google doc. Yes. In all caps and bold. So Andrew I think that tells the story. 

Bryce: [00:05:10] So the next one was around how you thought about investing for 2022. 

Andrew: [00:05:16] One of the reasons I'm so excited about 2022 from an investment standpoint, and particularly from the standpoint of people listening to equity markets in a slightly younger population than me is that you cannot just invest on themes.

Bryce: [00:05:39] So that was the comment slash prediction. What firstly did you mean by that? 

Andrew: [00:05:43] Okay. What I meant was in say 2020 and 2021, our number one only really had to do was be long equities for so long index. But number two is actually best to have been long mega-cap growth stocks in both of those years. In 2020, it was good to have been long, sort of rather more speculative growth stocks and things like that. Whereas in 2021, that wasn't the case. That will start to break down. I think it's fair to say on this one, I wasn't right. Okay. Okay. Because there was one theme that all their effect, two themes in my opinion, dominated. What are we going to come to in a minute, which is megacap tech. Okay. That you could invest on that same just shorter. 

Alec: [00:06:29] All right. I was going to say. Yeah, because they were down. 

Andrew: [00:06:33] Okay. We'll come to that in a second. Okay. The other thing, of course, was commodities on the long side, and it was commodities that maybe many of you would find absolutely repugnant. But, you know, things like coal, things like gas, things like oil. I know. All come way off the boil. But, you know, oil went up to 120 bucks a barrel on U.S. crude before going back into the seventies. So the same was and you can see it in the Australian market, which we're going to get onto as well. That was the absolutely overriding theme in the Australian market. If you're going to be in the Australian market, hold your nose and buy commodities that you may not like and well, you've have had more money in your pocket at the end of the year than this. 

Bryce: [00:07:15] So you're giving yourself a no for that. 

Andrew: [00:07:16] The three of us so far have not. Now, the reason I say the reason I say the reason I say in your half now is one of the other things that happened. There was quite a bit of takeover activity around and that was right across the market and right across the board. And that wasn't thematic in any shape or form at all. It was just kind of quite widespread.

Alec: [00:07:37] I feel like it definitely became more of a stock pickers market especially. So I would have just looking at that, I would have said Yes, but hey, we can give you half a point. It's like it's like my parents when they played a good weekend quiz on the weekend. Mum will try and squeeze out a quarter of a point or a third of a point if she gets it directionally. Right. So. Well, we'll give you half a point here. Right. 

Bryce: [00:08:02] Alright. The next one, Andrew, was around where you would be expecting to see growth come from in the US market. 

Andrew: [00:08:08] There is a real chance in a year when you have midterm elections. So the t word gets put back in the vocabulary. Unfortunately. Fortunately. Okay. Yeah. That's going to create a lot of uncertainty again, in my opinion. So I think it's really likely that trying to get 10% things priced out of the US in this type of environment may not be that easy. And it's earnings growth that's going to drive the market because as I said, there's not interest rates going to drive it and there's no enthusiasm by investors is going to drive it because I've driven that enough already. So it's got to come from earnings growth. So if you're buying expensive growth stocks, you better make sure they're going to grow this year because if they don't, then they're going to be a little bit troublesome and that might even include some of the big guys. 

Bryce: [00:08:57] There we go. Light it down. 

Alec: [00:09:00] So a couple of things there. Now, you mentioned Trump. Did you buy his NFT? 

Andrew: [00:09:06] No. I should have done, apparently. I think the recycled news. Yeah, that's right. 

Alec: [00:09:12] They're up already like a couple. 

Andrew: [00:09:14] It's a bit like buying de wack for a dime. It had to be in and out quickly. 

Alec: [00:09:20] Bryce picked up a couple of. And it's. [00:09:21][1.2]

Bryce: [00:09:21] Not true. So. So will the Trump back in the equation is a tick? Because he ran out. [00:09:27][5.7]

Andrew: [00:09:27] He was back in the equation. But obviously, certainly in terms of the midterms, I don't think had any impact. [00:09:33][5.6]

Alec: [00:09:34] Oh, yeah. Yeah, I think he had a profoundly negative impact. [00:09:37][3.1]

Andrew: [00:09:37] Yes, correct. [00:09:37][0.3]

Alec: [00:09:38] Candidate selection on the polls. [00:09:41][3.1]

Andrew: [00:09:41] I mean, it to be fair, that possibly wasn't what I was aiming at. Yeah. I'm, you know, personally thrilled. That's the way it's worked out. [00:09:49][7.7]

Alec: [00:09:49] I mean, the only challenge to that was, was he ever out of the equation? [00:09:53][3.4]

Andrew: [00:09:53] There was a period of time where he went very, very quiet. And then he really did lift as the midterms came closer. And, you know, his candidates obviously got promoted and unfortunately for him, didn't do well. [00:10:05][11.3]

Alec: [00:10:05] Yeah, but the next part of it earn 10%. Earnings growth won't be easy. Well, I think from FactSet where like 5.6%. That is correct. Yes, that's true. That wasn't easy. [00:10:18][12.7]

Andrew: [00:10:18] So the great irony is that when we made the tape for for last year, which was January, the EPS for 2022 on FactSet for the S&P 500 was 221 points and disagree states 221. All right. So, in fact, our 2022 earnings expectations went up into the about the 200 and thirties and then slithered back. I think everyone's aware that earnings expectations being wound back at the moment for fairly obvious reasons. So in fact, you had five and a bit percent earnings growth, but no, no growth in expectations from when we when we made the tape last year. Okay. So 10% earnings growth wasn't easy. We didn't get there. And I was at pains to stress this when we made bold predictions. 2022 was that the eight megacap tech stocks that I define as the eight, you know, so matter Apple, Microsoft, Google, Netflix, which I know is a smaller company these days, Amazon in video and Tesla. Okay. I said, you've got to remember, guys, they had gone up 16% in the final three months of 2021. And on an average basis, got 45% over 2021. And the average pay for these guys is about 40. And so I said, you know, like, wow, these guys got to deliver to justify that. And one of the reasons the S&P 500 is down about 17% is that bluntly, none of these stocks have delivered, really with the exception of Apple.

Alec: [00:11:51] Apple down 20%, Nvidia down 40%, Tesla down 60%. Microsoft down 23%. Amazon down 46%. Meta down 65%. Alphabet down 34%. I didn't get Netflix, but on average those seven.

Andrew: [00:12:05] Netflix. Netflix was down 40 odd, having been down 7% in stage one. And so they're just terrible value stocks.

Alec: [00:12:14] But I think I think the conclusion there is that enthusiasm certainly didn't drive the market. Not like some of those companies. Well, some of them didn't deliver earnings season, but some of them definitely have a perception problem, perhaps more than a business problem. 

Andrew: [00:12:33] That's fair. Okay. But a lot of them have got the business problems came to light for many of them during this year. And the business problem is that the competition between some of these guys in certain parts of the market is extremely robust. Think about cloud. Okay. With cloud, you've basically you've got Amazon, you've got Microsoft and you've got Alphabet all going for the same audience. Okay. And don't forget, Alphabet is the laggard in that one, whereas they may be, you know, upfronts in other things. You've got Apple who has decisively shut the gateway on Facebook slash matter, who in our has spent billions to get round that gateway. Tesla obviously its brutally delivered on its numbers but you know the fact is the shares which is wickedly expensive and now obviously it's got this other issue that, you know, is pervading it, you know, being Musk and his attention to Twitter. So you actually look at it and each of them where the possible exception of Apple which is more to do with just Chinese production issues and COVID and everything else. Most of them have had a little bit of a business problem as well, haven't necessarily delivered on the earnings, particularly in the third quarter of the year where that really came home to roost because advertising is slowing. You know, you might be dominant, but it's still slowing. And so, you know, what you've really had is you've had some issues weighing on them. The earnings multiples were too high. You had no expansion of earnings. Not all bond yields gone up. And so they just couldn't sustain, you know, the kind of cloud like ratings that they had. 

Alec: [00:14:15] All right. Put a question without notice for both of you. Of the eight. Who does the best in 2023? 

Bryce: [00:14:21] Nvidia. 

Alec: [00:14:22] Really? Andrew. 

Andrew: [00:14:25] Meta. 

Alec: [00:14:25] I like that. Are you saying Microsoft. 

Andrew: [00:14:29] In terms of stock price? Yeah. Yeah. 

Bryce: [00:14:32] All right. Jumping the gun on 23. I like. 

Alec: [00:14:34] That. That's a yeah. I actually bought some meta right at the bottom. 

Andrew: [00:14:38] So did I. Yeah, I did that slightly. Yeah. First I bought them. Yeah. 

Bryce: [00:14:43] Wow. Yeah, they go. All right. So a few yeses in there, a few no's, but generally it's a yes. 

Andrew: [00:14:50] I think that's obvious. I'll be blunt. Of all the 14 predictions, that is the one. I think that is the bang on nine. 

Bryce: [00:14:58] All right. So we've got two that sort of centre around China and Hong Kong, so I'll play both of them and then we can and we can have a chat. 

Andrew: [00:15:06] The most obvious place to look. Because everybody else has said we are not playing here any more. We want to play on your pitch any more. We're leaving and we've sold our stock and left. 

Alec: [00:15:18] Can, I guess. 

Andrew: [00:15:19] Have a guess? China. China? Absolutely right. The second place to look is Hong Kong, because Hong Kong got really shredded because Hong Kong was supposed to have some degree of autonomy from China. And obviously, as we saw in 2021, that disappeared. My favourite play in Hong Kong and it has the ticker symbol WAN. Oh, I see our own one. Hong Kong is by C, c, k Hutchison.

Bryce: [00:15:48] First place to look, China. Second place, Hong Kong. Had we fair? 

Andrew: [00:15:52] Not good, but not as bad as you might think. Okay. Okay. So I'm not trying to wriggle out of this, okay. Quite clearly, if we had of recorded this in October, I'd have been hiding under the desk in a big way. Hong Kong was down 38% at one stage at its low from roughly the year end. And clearly it was to do with the fact that our two real issues, which was the, you know, Jinping's rule over China has been solidified. It really is a sort of one man state at the moment. And secondly, his view on how to eradicate COVID, basically kill the economy. You know, you never know how much it killed the economy, but it's pretty obvious it did. And it's only once that those restrictions on COVID have been lifted. And, you know, people have been spreading it with alacrity each other. But the economy is back up and running. The stock markets in both Hong Kong and China have, you know, have rebounded and might have they rebounded, you know, not forgetting the month of October or November. Hong Kong was up 25% in a month. You know, like so, you know, these things got absolutely pounded. I did talk a little bit about the big tech stocks in Hong Kong, and I said one of the ways to buy them was K Webb. K Webb's down about 17% over the year. It's down about down about 14% from when we broadcast. So that's actually no worse. In fact, it's better than the S&P 500. But boy, did it take you on a ride. And in essence, both Hong Kong and China took you on amazing rides. If you dollar cost averaged, you're actually not done too bad. But that's a weasel words, I guess. The simple fact is China didn't do any better than America, and it was a hell of a lot more volatile in terms of how much C.K., how much C.K. Hutchison is. Basically, it's the holding company for Li Ka shing. He's the richest person in Hong Kong, and it's basically a conglomerate. It's a real conglomerate. It basically owns one of the world's largest beauty and health retail chains, which is called Watsons, which is obviously in in that region. It's got a lot of poor assets in Hong Kong and in China. And of course, it's got massive telecom interests, mobile interests in Europe. It owns for example, it owns the three network in in the UK. So with Arch, what's happened with Hutch, it's down roughly about 20% since we broadcast. So it's done no better than markets is pays now five. Oh wow. So in fact all that's happened is Apple Pay has gone from about 7 to 5. Its earnings are still actually growing, not very much, but they're growing a little bit. And what investors are looking for in Arch is actually some mergers and sales of some of the mobile phone carriers that they own in Europe, particularly actually in the UK where there's a proposed merger between three and Vodafone, which is, you know, that's going to obviously get sussed out by the monopoly authorities and everything else because it is going to make the largest pie. So what you're looking at is a bit more capital management. Yeah, a little bit more merging and a little bit more earnings growth and a little bit of a pickup in China. And how much roughly the current price of 45 HKD a share per year? Five. I still own it. I haven't touched it during the year. Nibbled around obviously in it a bit as it's come down. I still rather like that, but it's not a huge player on Hong Kong. It's a bit of a play on Hong Kong, the markets in China and Hong Kong quite clearly I think they're just really going to be driven by government again. I certainly think, you know, at these types of levels, you know, I do think they're actually, you know, quite interesting. It sort of below 20,000 on the Hang Seng index and around 13 on the China I index. I think they're quite interesting, certainly because it's clear for the government that they still only exist at the behest of the population and the population are happy and they want the population, the trade off. We all know the trade off in China. The trade off is basically political freedom for economic wealth. Yeah, that's the trade off and they haven't had the second bit of it. 

Alec: [00:20:03] Yeah. Yeah. I guess the big question with China this year is, is COVID zero what actually happens with COVID? We spoke about on our dive podcast this morning that the official numbers coming out of China are 2000 cases over the weekend. Some unofficial estimates put it up to 40 million cases. Yeah, exactly. That's a wide range of outcomes. 

Andrew: [00:20:24] So I think what's quite clear is, I mean, I don't forget, I mean, you know, just the way we have in Australia and around the world, you sort of get used to COVID, you know, we get it and you know, each of us is going to get it now and again. You might get it once a year. It's not the flu, but we're going to start treating it like the flu, I think is the best way to put it. 

Alec: [00:20:41] So let's put a pin in China. Yep. Because let's move to another authoritarian regime that captured headlines this year. And this is probably the bold prediction that stuck out in our mind the most, and that was around Russia. 

Andrew: [00:20:57] There's one other market which is actually very, very big. It has some astonishing companies, and particularly just as we speak, for reasons which are extremely obvious, called the Ukraine border. There are a stack of things in Russia that are about as cheap as they ever get. One hint on buying Russian stocks. Number one, you can buy them in London. So you can buy all these things through global depository receipts in London. So you don't have to open an account with a stockbroker you'd prefer not to. But the second thing is you always buy Russian stocks when there's a political problem because they can run extremely hard and get not super expensive, but a little expensive. But they fall to pieces whenever there's a risk of some real political upheaval. And the political upheavals usually revolve around the armed forces. Yeah, yeah. Okay. And they use revolver and the armed forces sort of poking their nose into a former Soviet republic. 

Bryce: [00:22:04] So that was the commentary. Now, you did also do a follow up written piece that's available on our website, I think, around March or April. Mm hmm. That was actually at the from the request of the community, because they listened to this and then wanted your thoughts on, you know, how do we approach Russia post invasion? So where we are. 

Andrew: [00:22:25] I think the woosh sound is the sound of Andrew Brown leaving the very rich. There are a few things in that which none of none of that is worked out. Let's make that abundantly clear. So none of that was worked out at all. The only thing I think is vaguely worked out. I mean, obviously the oil price has been good. And I think one of the stocks I mentioned was Gazprom. But you know that that stock is down even though every other oil stock in the world is up by multiples. First of all, the London listings have all gone. They've all been delisted from London. So you either had to get out or I've been able to convert one of my London listed stocks, which is Spur Bank into Russian stock. So I actually I actually held Russian stock on one of my accounts and I can't sell it. But it's you know, if things things clearly will liquefy at some stage in the future, it's just you don't know when. But they will liquefy at some stage in the future, hopefully when someone else is liquefied. Why was that prediction wrong? Before I made that prediction, obviously before I bought any shares in Russia myself. Yeah, quite clearly. I want to check out, you know, what is the real probability of Putin invading Ukraine in a serious fashion other than skirmishes along the border which have been going on for ages and know a lot of people that are really, really smart, you know, that know Russia extremely well and have virtually universal opinion from them, was he won't do it because you won't be able to execute it properly even. I mean, Bill Browder, when your guests Bill Bradley said that. Okay. And various other people I listened to that, you know, Russian emigres, everything else virtually to a person said that he wouldn't do it because it would turn into a disaster. And I've been absolutely right. It's turned into a disaster. But unfortunately, he did do it. So I think it just shows how mentally unstable he he is now. He's clearly ill. Not you know, he's clearly physically ill. I think you can see that as well. So clearly, what I did not expect to happen happened. And while I certainly did not expect and I think I made this clear in the piece that I wrote, was that Europe was so stunningly unified to put in place sanctions against Russia in that way, even though it hindered them economically. Yeah, because of the lack of gas and to a lesser degree the lack of oil and some other things. Clearly the fact that he went into Ukraine and then the Europeans specifically reaction rather than the US reaction. One of the things that we've now seen and we've seen it a little bit in terms of the US-China relationship as well, is, guess what, financial warfare? Is now a real thing. I think we will. You know, if you are if you're if you're a naughty country, we will take away your access to capital markets, particularly if you're a bit more of a fringe country. You will not have access to capital markets. And that clearly has caught up with Russia. They've tried to negate that with obvious things like, you know, curtailing oil supplies and gas supplies and everything else. How does this play out? Well, look, none of those shares are going to be liquid. You know, I can't sell my spur bank, but nothing will be liquid until basically the UK, the Ukraine situation is settled. And settled does not mean Russia controlling Ukraine. It means Russia getting out of Ukraine in some agreed fashion or whatever that fashion is. And it probably really needs Putin to not be around, to be frank. And, you know, my suspicion is that on natural causes rather than and bullets and bombs is the best chance of him disappearing. 

Alec: [00:26:11] Did you guys say the story earlier this month that he fell down the stairs and soiled himself? Yeah, potentially a bit of information warfare from our American friends. But I like to believe it. It's true. 

Bryce: [00:26:27] All right, Andrew. 

Andrew: [00:26:28] So that's a that's a category across the country. 

Bryce: [00:26:33] All right. We move on to a stock specific comment. 

Andrew: [00:26:35] Yeah. One of my interesting ideas I've got and I do have a holding in it is Dropbox. Oh, interesting. Dropbox is $9 Billion. Business Market Cap. Scott Net Cash. Scott Elliott Associates on the Register which is generally a good thing. Hello BHP.

Alec: [00:26:51] Well, Twitter had them. 

Andrew: [00:26:53] So nothing's going to happen. Dropbox is interesting because they've actually changed tack. 

Bryce: [00:26:58] So that's why we landed it. 

Alec: [00:27:00] So let's start with the outcome and then get to how it happened. Dropbox down 7% year to date. Yep. But that's the best of a bad bunch when it comes to tech stocks. Yeah, we said what? Apple is down 20%. Microsoft was down 23%. Alphabet down 34%. Yep. So Dropbox beat them all? 

Andrew: [00:27:19] Absolutely. 

Alec: [00:27:20] Well, you write in your thesis. 

Andrew: [00:27:22] Yes. Because what the company's done is just carried on doing what it's been doing for the last year and a bit, which is under pressure from Elliott and others. The company's been basically growing its free cash flow as quickly as it can. Okay. Now its definition of free cash flow includes stock based compensation. Okay. Which obviously adds to free cash flow. But it's talking $1,000,000,000 of free cash flow next year and about 360 million of that will be stock based comp. Okay. But it still means they're going to be minting 6 to 700 million of real free cash flow. The market caps about 8.5 billion. There is no debt. So the thesis that I had a, you know, plus on a year ago, it's just continued playing out. It's just the market hasn't wanted to pay any more for it. Okay. But certainly in terms of delivery, the margins that the company's got have grown quite sharply. They're up over 80% from the mid seventies. They're continuing to grow customers and they are continuing to produce genuine free cash flow, which they are using to buy back stock aggressively. They've bought back 7% of the stock this year. 

Bryce: [00:28:31] Can you explain the share component of that free cash flow? 

Andrew: [00:28:36] Yeah, there are three components to cash flow in any set of accounts. There's what's called operating cash flow. They're saying invest in cash flow and financing cash flow. I'll do what's financing first. It's basically share issuance. Okay. But it does unfortunately include leases on rentals these days thanks to the world of accountants. Investing cash flow is predominantly capital expenditure. Okay, so buying new plant, new servers, new whatevers and things like that. Operating cash flow is obviously what comes out of the business. And quite clearly if you pay your staff using shares, then you're not paying them cash. Okay. So you have to expense those shares in your profit and loss accounts before you then adjust them out with adjusted EBITDA and things like that. But that has to go through the accounts. But of course, you're not paying out cash because you're giving them shares. And so it boosts your operating cash flow relative to your reported profit. Okay. And there's about some of these things are very significant. The big kahuna of this is, you know, is your favourite Australian tech giant Atlassian. Atlassian only make cash flow because of the vast amount of stock they issue to employees. And don't forget, this gets harder, as you know, when your share price comes down by three quarters. Do employees really want that stock anymore? Can they can I live without it? And do they really want cash? And if that if if the market for tech employees is tight, you know, then basically people who've got a place to buy cash. Australian stock now. As we well know, the market for tech employees may have been tight a few months ago, but it ain't tight anymore. You know, it's getting worse. 

Alec: [00:30:19] Well, Andrew, that's seven of the 14. I think we give Dropbox a yes. So to recap, we've got yes to inflation, no to investing themes, yes to Trump is back in the equation. And earnings growth. Big. Yes, big, yes. The two about China? No. Russia, no. Dropbox, yes. So we're about 5050 at this point. 

Andrew: [00:30:44] Yeah. Fair comment. 

Alec: [00:30:45] So let's take a break. And then on the other side, we're going to talk crypto, politics, property prices and the RBA. All right. Well, we are joined by Andrew Brown. We are reviewing his bold predictions for 2022. We've covered seven so far. We've got seven to go. And Andrew, this one was all about crypto. 

Andrew: [00:31:07] I do believe one of the things I think is really going to happen over the course of 2022 is I believe the crypto world is going to go through some fairly significant upheaval. I think. 

Alec: [00:31:22] That is a bold prediction. 

Andrew: [00:31:23] That is a prediction. And the upheaval is going to mean that Bitcoin ends or degree of serum are going to get moved out of fashion. Because Bitcoin does nothing. It does zero. It has all this money. And just the. 

Alec: [00:31:38] Guy I take it up with and just. 

Andrew: [00:31:40] Tired of it does nothing. Etherium does some things. We know Solana does some more things, and then there's a whole lot of other coins which you can ring me up and tell me about, which do lots and lots of things and will play a role in the metaverse. And they will play a role in distributed ledger technology. They may play a minor role in fintech. I think what's going to happen is in the crypto world, the regulators are starting to come in a world where interest rates are going up. So your speculation is no longer free. Where to? Many of the old coins are controlled by whales. These things are oligopolies. Yeah. You don't come and tell me you love crypto because you are rebelling against the world and you want a new world. That's a nonsense. You know you're not. You're making the rich people even richer. Okay. I urge you to read a piece by Scott Galloway, which is published recently, which called Web3. Yeah. Okay. And it's about how many of you think Web3 is wonderful, but it's the same old oligopolies. It's just a new bunch of oligopolies trying to get rid of the old bunch of oligopolies. Well, if you want to do that, you might as well reinvest in Russian equity. [00:32:59][78.7]

Bryce: [00:33:01] So upheaval. We certainly saw that. [00:33:03][2.4]

Andrew: [00:33:04] Absolutely. The most interesting thing I mentioned, Salon or on there, obviously Salon, I got absolutely smashed to pieces during the year because Solana was one of the coins that was involved in the terror lunar collapse. It was on the fringes of the FTC's collapse as well. One of the things I didn't mention clearly there, and I think the thing that's really come home to roost in crypto this year is, you know, it's not just the collapse in the value of these coins and the collapse of exchanges and networks and the fraud that's gone on. What I think stunned everybody is the interconnectedness of these networks, which I don't think until partway through the year really got brought home. I went to a lunar collapse. I think it was then that people started to realise, hey, you know, all these guys are linked up, you know, in various different ways. And we didn't really know that. And that, of course, starts to spread fear and panic or FUD. That's all you crypto geeks say. But yeah, it's real FUD, you know, because it turned out, you know, they were all lending to each other. Yeah, they were all utilising, you know, the exchanges to, you know, to borrow money from, you know, you know, if you don't believe me, just, just read the SCC indictments against SBF. Yeah, no, we're not saying that's true. It's an indictment. So it may or may not be true. It's got to be proven in court. But wow, you know, it's pretty amazing stuff, you know? You know, it's like you give you know it seriously not giving you money. The stock brokers giving you makes the ASX. Yeah. And the ASX says take your money and lend it to some hedge fund that they're operating on the side. You know it's just incredible. It's absolutely incredible. And you know, I, you know unfortunately nice and people in Australia who had money on FCX thought it was reasonably safe. You know, forget it. It's gone. So look, I think I'm not saying Crypto's dead, but I think he's, you know, he's pretty badly wounded. And I think for people that are pro crypto, you know, to build your case to explain why people should invest in crypto. Yeah, I think in the future is going to be extraordinarily difficult. And of course, we've got to the irony that you've got people in crypto, you know, the free world who want the regulators to come and clean things up for them. Well, that's that's nonsensical. It's not. 

Alec: [00:35:28] Yeah. Yeah. There's a little bit of that isn't there. There is. 

Andrew: [00:35:30] Which is, which is really poor. So yeah I got a client 11 out of ten on that one. 

Alec: [00:35:36] Decentralised profits. Centralised losses.

Andrew: [00:35:38] Yeah. Exactly. Yeah, it's called capitalism. 

Bryce: [00:35:42] All right. The next one was to do with the election. 

Andrew: [00:35:45] We've got an election. The election's going to be close. I think there will be a change of government, but they're not going to majority in the upper house. Easy. Yes and yes. Yeah. Tick, tick. 

Bryce: [00:35:56] All right, the next one, Andrew. Got to squeeze in a property one. And boy, did you squeeze one in. 

Andrew: [00:36:02] So Australia could be interesting and the economy is is a lot slower and property prices start to come off and they will. 

Alec: [00:36:09] That is a bold prediction. 

Andrew: [00:36:11] Property is 96% of GDP.

Alec: [00:36:13] Saying property prices will be lower. Yes, I'll write that down. Lots of all prediction. 

Andrew: [00:36:19] Yeah, nobody expects it. 

Bryce: [00:36:21] There we go.

Alec: [00:36:22] There we go. 

Bryce: [00:36:23] Prices are lower. 

Alec: [00:36:24] Well, and I think we can definitively say you're right there. Sydney, I think is down 11%, correct. Nationally, I think we're down about 3% for the year. 

Andrew: [00:36:33] Oh yeah. I think that's, I think that's taking Adelaide and giving it a weighting of about 40% or something. Yeah, it's more than that. 

Alec: [00:36:39] I'm just afraid to pull logic here, but I think either way property prices down. 

Andrew: [00:36:44] What I do want to stress about this, I mean I think that's, you know, I think that's a tick. But what I do want to stress is I yeah, and it goes back to where we were, for example, on the big eight US tech stocks. I don't think anybody realised that or not anybody, but a lot of people didn't realise the level of euphoria that there was at the end of 2020. What I knew there was euphoria, but I didn't probably realise the magnitude of it. Okay, so you know, you had high PS, it was a 21 play on the S&P 500 and expectations of growth. And obviously you had extremely low interest rates here, which I said were going to go up and, you know, property prices that, you know, you couldn't climb over at the time. And, you know, because property is a great asset for the vast majority of people, it's meant that people that bought around the end of 2011 and the early stages of 2012, sorry, 2021, the early stage, 2022, obviously in a bit of a hole now and with inflation the way it is and if they're disposable income as well, if their income hasn't gone up, then they disposable income has gone down and gone down sharply. And, you know, so it's you know, it's going to mean, you know, a bit more pain, I'm afraid. 

Bryce: [00:37:55] Yeah. 2023 will be interesting. Alright, so we'll keep moving. The next one was about rates and the RBA. 

Andrew: [00:38:03] If interest rates go and we've got to, you got to say, I mean the wine situation and I mean you can criticise a lot of institutions in Australia, but on the. Yeah, in all seriousness you really should criticise the Reserve Bank of Australia. You know they have lost the plot. 

Bryce: [00:38:21] And they did get criticised. 

Alec: [00:38:23] Yeah, by price. Bryce decided halfway through the year he was sick of Phil Blow. Feel it like. Yeah. 

Andrew: [00:38:29] The most damning stuff on the RBA and I've been even more vitriolic towards them now than I was a year ago. There is a series of freedom of information email releases to do with many things, but the RBA were wondering why one of their economic or econometric models, which is being used by Chris Joye, who's Iran's Colaba Capital and also is a correspondent for the Fin Review and writes some really interesting stuff for the Fed. And he had a guy called Peter Tulip who used to work for the Reserve Bank and Patra developed some of those models and they were running the models and they were showing basically that property prices were going to go down and go down sharply. And the Reserve Bank's application of those models was showing that property prices were going to go nowhere and they were wondering why there were, you know, they realised that, you know, it was the same model and I didn't know why there were differences and there's been some freedom of information releases. And what it showed categorically is the Reserve Bank is just replete with groupthink. They don't get out there, they don't look outwards, they just look internally. So all they were doing with their models was sort of playing around with the models, trying to make it work a bit better. Yeah. In other words, they're sort of trying to fiddle the model. And it was a nonsense and it took them ages, Nigerian ages, to actually look outside and realise what was different. And the fact that Peter children made a few changes because models change, you know, that's, you know, particularly econometric models to reflect what changes in the economy and the Reserve Bank have just been shown to be inward looking, group thinking people, you know, the top six of whom get paid over $1,000,000 a year. That's outrageous. So it's no wonder there is a review into the Reserve Bank. And I'll give you one bold prediction for 2023 right now, which is when I come back at the end of the year, Philip Lowe will not be the governor of the Reserve Bank of Australia. Okay, full stop. And no, should not be a disgraceful performance. 

Bryce: [00:40:32] There you go. 

Alec: [00:40:33] The chair of Saba's board or. 

Andrew: [00:40:36] He'll have another extremely well paid job somewhere. He's he's a nice guy. But his performance as RBI governor has been appalling. Yeah, it's been dreadful. And the culture of the RBA is as much the issue as his prognostications about interest rates and he had plenty of chance to walk them back and didn't. But the culture the RBA laid bare in those emails is awful. 

Alec: [00:41:01] Well, we should say because it seems that the RBA is a hot button issue in the Equity Mates community. Every time we post a meme or something about it, half the people jump on this bandwagon and start criticising the other half criticise people that borrowed based on Phillip Lowe's forecasts. I think we can say that regardless of how much stock you should put in what the RBA says when you make personal finance decisions, the RBA screwed up. 

Andrew: [00:41:26] He could. There is plenty of chances to re-emphasise the conditionality of the forecast. And that wasn't done. Yeah. And then he sort of says, oh, well, but you know, I just thought it was conditional. He had plenty of chances. He was only when his job was on the line that he went on television. And I remember the RBA governor, you know, they don't do press conferences, you know, after each rate rise, you know, at all. So it's a very you know, it's a very sort of inward looking kind of thing. So I hope whoever the next Reserve Bank governor is, basically they have a press conference at the end of each, you know, RBA rate announcement to put some more bones on the feeder paper they put out that everybody his word to you know see what's changed from last months to this month. 

Alec: [00:42:10] Does the Fed, does Jerome Powell do the press? 

Andrew: [00:42:12] Yeah, absolutely. So it's open. And I'm sure the press conference gets misinterpreted sometimes. And yeah, people place too much store on word changes and things like that. But then it's up to you as the governor to, you know, to, to play to that we. 

Alec: [00:42:27] Should pitch the RBA to do a podcast. Not no, no pesky journalists asking the questions. 

Andrew: [00:42:35] Bluntly, bluntly you should ask Philip Lowe to come on here because it is, it is your age group and your cohort that are probably in, you know, in the most pu, you know, if, if they did go deep in 2021 or 2022 in borrowing money for a house. Yeah. You should get him off. 

Bryce: [00:42:55] I think we have asked. 

Andrew: [00:42:58] Ask again. 

Bryce: [00:42:59] We'll ask you get help asking. 

Andrew: [00:43:00] Well you know, scrambling for it. You know what it's like politicians going, you know, politicians go and kiss their fame and subject them sales to call in checchio when there's an election. 

Alec: [00:43:11] OH is Andrew comparing us to Colin? 

Bryce: [00:43:13] Jackie Hopefully not. Let's get moving. 

Alec: [00:43:18] Island. Jackie of Finance. 

Bryce: [00:43:20] We've got one on inflation in Australia. 

Andrew: [00:43:22] Labour costs are going up, other costs are going up as well. And it's labour costs the sticky. And remember the big thing about inflation where I might be wrong, what you don't want to see an inflation is starting to happen is inflation expectations rise. People start to say, Oh, I want a pay rise. Why? Oh, because my bus fares more. But it is still costing a lot more. Two thirds of the way through 2022. Then we've got a problem. Okay. And Australia's not immune from that. You read the Financial Review. It's, it's, they're thinking we're immune from all this stuff. Get out of here. We're not. Absolutely not. 

Alec: [00:43:56] Today, Andrew, you escalated your how direct you were at some Australian institutions, the Reserve Bank, the AFR. 

Andrew: [00:44:04] At that stage I think look a lot of you were living in dreamland, you know, a year ago and yeah, go back, you can dig and search the stuff out on the net. You know, it was far too euphoric, far too bullish. So labour costs going up, look. Yeah, they have. But obviously they still are going up. Yeah. At a rate that keeps pace with inflation at all which is a bit of an issue and that's why you're starting to see more and more industrial disruption. Yeah, a lot of it is government owned instrumentalities with disruption. Yeah, transport networks and things like that. But you know, you are starting to see more of that inflation expectations. I think, you know, they've definitely risen. But I do think that people you know, people are now so worried about their economic circumstances that that's sort of being pushed away a little bit. You know, they much more worried about their economic circumstances, which is why you see in surveys people working two jobs because they can work two jobs. The demand for their labour is, you know, with 3.6% unemployment. So the demand for their life is there, whether they can keep working two jobs for their mental health and their physical health is a different matter altogether. But I think know the inflation expectations bit I think is probably levelling out. And I think, you know, you might start to see that inflation is levelling out a little bit as well. Don't forget, we calculate it very differently to what they do in the US. You know, the shelter component in the US is a third of inflation here. It's not so here. We were much more impacted, I think directly in the figures by the supply chain and that clearly is tied away a little bit to me, as I think you've seen with the latest figures. I think inflation's starting to level out here. And if that happens in. And expectations are levelling in. 

Bryce: [00:45:57] All right. Two to go. This one is on the Aussie, Aussie market. 

Andrew: [00:46:02] I don't think the Aussie market will be that bad. Well, I just don't see it being that good and nailed it. 

Alec: [00:46:08] Nailed it. Yeah. So America's year to date down 19%. Australian year to date. What, down six? Yeah. Is that it? 

Andrew: [00:46:17] Yeah, that's about right. Yeah, absolutely. 

Alec: [00:46:18] So. Oh, not bad. Yeah. Not good. 

Bryce: [00:46:21] Can't go wrong with the. 

Andrew: [00:46:22] The simple thing, as I alluded to earlier on is, is basically is the resource sector the size of the market. And in fact, you know, it was three letters, so some degree size of market which is BHP. 

Alec: [00:46:34] I was going to say coal is full letters. 

Andrew: [00:46:36] Yeah. So I mean don't forget those, you know, this sort of whitehaven's of the world and everything else, so much lower components of the index. If you bought BHP at the year end, you paid 41.50, but you've had 4.65 dividends and you've had 6.44 roughly equivalent of Woodside shares where the distribution is sort of roughly one for five in Woodside. So BHP has returned about 37% net. And if you said to me, you know January one, January one, 2022, BHP is going to do 37% now that net you now CommBank is done pretty well but it's done much better than most the other banks. So Macquarie's down 15. Everybody's favourite thing is hardly surprising. The two bellwethers of the economy, which is down nine and a half times, speaking in Wesfarmers, down 20 before dividends. Yeah, don't forget the Wesfarmers dividend is very generous and CSL up three sister sales flatline which is pretty good, but it's been resources that are really held up the Australian market in a much better way. But bank stocks have actually held up fairly well. They've certainly done better than the US bank stocks did for a while. The US bank stocks have rebounded quite strongly from where they were in September October. 

Alec: [00:47:55] Is that surprising, though, given rising interest rates like you would expect the banks to do? 

Andrew: [00:47:59] Okay, you'd expect the banks to do okay in a in a in a softly. I mean, I figure it's been a steep interest rate rising environment. Thought you'd expect them to do reasonably well for two reasons. First is, don't forget, banks have got equity. Equity in theory, is free from a banking point of view. So what we call the endowment effect, which is simply, you know, the fact that you're earning sort of 6% instead of five on, on, on the free funds obviously helps your earnings. And then secondly, you can increase your margins in a rising interest rate environment that's not necessarily fully come through yet because there's been a fair amount of competition in the housing market. And that's and because they're all they're all housing banks now and that's and so and so if you look at Nims, they've been a little bit variable and they haven't really moved up, but they're all cutting costs like, you know, it's gone out of fashion. 

Alec: [00:48:52] So I was just gonna say what's NIMS. 

Andrew: [00:48:54] Net interest margin. 

Alec: [00:48:55] Right? 

Andrew: [00:48:56] Okay. So you can measure it in various different ways, but it's effectively the spread between what you pay on deposits and what you earn on your loans, which you would hope is positive. 

Bryce: [00:49:08] And a final one, Andrew, which was commentary on someone who should do quite well in an environment. 

Alec: [00:49:12] Like this and who continues to refuse to come on our blog. Yes. 

Andrew: [00:49:16] I think John, in his own way is effectively paint the environment the same as me, which is John is short, what he calls crap, and he's long and good companies translation crap. Yeah, he's also crap. 

Alec: [00:49:29] Well, John is one of our white whales here at Equity Mates. He said no to us a few times, but. 

Andrew: [00:49:34] You get it, you'll get him on. And he's, you know, this this is the kind of environment he does really, really well. I haven't seen John's numbers yet. And they only come out usually, I think I call it monthly. Certainly the inverted commas that he was shorting has collapsed or the ones we know he was shorting have absolutely collapsed. So most of the meme stocks have collapsed, particularly AMC. We know that second line tech has been a horror story. It stunned me, actually, because in doing the homework to come on here, you sometimes forget and you think it was maybe the year before the year that you're actually reviewing and it wasn't. I nearly fell off my chair because I was short this the the all prices but things like ARC which is the best bellwether for second line rubbish arcs down 63% is basically down from 90 odd to the mid thirties. The reason I'd lost track of it was I covered my shorts at about 39 and it's actually sort of wallowed around in the thirties for quite some time since which was midyear, but I'd forgotten that was as high as, you know, 96 and 100 a year ago. Peloton is the other classic. It was down 67% in 2022 to date and that was after it was down 75% the year before, you know, I think. Like GameStop running down 30 Bed Bath and Beyond, which a lot of people were touting a year ago is a nice recovery stock. It's down easy. AMC is down about 50. All the all the second line tech stuff that people were still a little bit excited about at the start of 2022 has really fallen in the hall. So I'll call that crap as opposed to fraudulent stuff, which we know. John Short. 

Alec: [00:51:18] Yeah.

Bryce: [00:51:19] So we're giving that a yes. 

Andrew: [00:51:20] I know, I know. One of John's bigger holdings is certainly up for the year, which is Regeneron, which I also held for most of the year, but don't at the moment. 

Alec: [00:51:30] Yeah, I think he also had a big position in Swedish Match writes on his Twitter and announced the acquisition never go through that. 

Andrew: [00:51:37] Is now going through. 

Alec: [00:51:38] Yeah. So we'll make some money on that. 

Andrew: [00:51:40] Yeah. So I'll give that a pretty decent take. 

Alec: [00:51:43] Swedish Match Bryce is one of the biggest customers here in Australia. 

Bryce: [00:51:47] So Andrew, that is ten out of 14. He did say it at the top. That's how it's transpired. Yeah. So I think that's a pass mark for sure. 

Alec: [00:51:56] Well, compared to what we.

Bryce: [00:51:57] Do what we do. 

Andrew: [00:51:59] Just to remind the listeners, we do this, we usually record this in January and it goes to a week or two later or a week later. And I don't get a chance to change any of this stuff. No. Yeah, it is. It is. It is a straight out, you know, sort of, you know, put everything on the table at the start of the year and you don't get a chance to change it. So, you know, I have to say, I mean, about four weeks into this thing on the guy. Oh, dear. Particularly with Russia. So I've got to say, I thought the environment, the overall environment I thought was actually fairly easy to call at the start of 2022 because, you know, I said I thought it was a degree of euphoria. I didn't realise how much. And of course it's going to presage the fact that I think 2023 is going to be much harder. Prospect. 

Bryce: [00:52:47] Yeah, so we are going to get you back, Andrew as always in at the start of 2023 for your bold predictions, which we're incredibly excited for, that is going to be a little bit later than normal mid-February when we're releasing that after our summer series. But Andrew, well done. Much better than Reddit. I guess we'll be taking more notes than usual next time you come in. But thank you so much for your time today. But Bay, also that the continued support for Equity Mates and the time that you give us each and every year, we do very much appreciate it, as do the rest of the Equity Mates community.

Andrew: [00:53:21] So it's my pleasure. You know what you do for people to help learn. That's the main thing. It's learning and then adapting their education to your style and your way of doing things with a few cool lessons underneath. And if I help you do that just one tiny bit, then it's well worth all my time coming on and doing it. Thanks. Thanks. You support and have a happy holiday.