The Joe Walker Podcast - Elephants In The Room - Jonathan Tepper

Episode Date: December 3, 2018

Which US and Australian industries are the most concentrated? How did Standard Oil inspire the Nazis? Why are...See omnystudio.com/listener for privacy information.

From Swagman Media, this is the Jolly Swagman Podcast. Here are your hosts, Angus and Joe. Hey guys, Joe here and welcome back to the Jolly Swagman Podcast. It has been some time and I'm sorry for that. Again, it happens but I do get busy but I'm now releasing a slew of episodes of which I'm very excited. For example, some that I've been promising for some time. A conversation with the physicist Garrett Lisi, who came up with the theory of everything. Another conversation with the great psychologist John Haidt.

And of course, a few episodes on the Australian property market. So I want to begin this episode with a statistic. 90%. That's the percentage of Australia's beer market controlled by the biggest four companies. Australia's beer industry is what you'd call concentrated. In other words, the biggest four firms control at least one third of the market. So next time you're down at the pub enjoying a craft beer, be it a Matilda Bay, a Napstein, a Kosciuszko, Furphy, Little Creatures, or White Rabbit, what you're really drinking in is the illusion of choice. And it's not just the beer industry.

In 2016, research by Adam Triggs and my old boss, Andrew Lee, found that more than half of 481 Australian industries are concentrated. For example, in petrol, the biggest four companies have more than 70% of the market share. And in the following industries, the biggest four companies have more than 80% of the market share. Department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food, and beer. In the United States, the lack of competition is just as bad. For example, only four corporations provide 57% of the poultry, 65% of the pork, and 79% of all beef sold in the US. The four biggest health insurers, United Healthcare, Aetna, Cigna, and the Blues,

have an almost 90% market share. And if you carve up the data at a local level rather than a national level, you'll discover that a lot of the airlines have local monopolies as well, or what are called fortress hubs. For example, United has 60% of a market share at Houston, 51% at Newark, and 38% at San Francisco, while Delta has 80% of Atlanta and 77% of Dallas-Fort Worth. All of this matters because when competition dies, higher prices thrive. For example, The Economist in 2017 wrote that 46 million American households are served by only one fast broadband provider, and those providers invariably exercise that market power to raise prices, which means, according to The Economist,

that American consumers would gain $65 billion a year if only they paid the same amount as the Germans do for their mobile contracts. Coming back to Australia, if we take the beer market again, over the past decade, the cost of a beer has gone up 42%, well and truly above inflation, which means that in real terms, what would have bought you a schooner 10 years ago today only buys you a midi. This episode is a conversation about the elephants in the room, the monopolies, duopolies, and oligopolies hiding in plain sight, and how they're stomping on workers, consumers, would-be competitors,

productivity, and growth. The result is a perversion of the market, ersatz capitalism, as Joseph Stiglitz called it, or the myth of capitalism, which is the title of my guest's book. The book's general thrust is that The Rise in Monopolies is the missing piece of the puzzle that helps to explain why in the 21st century something feels like it's rotten at the heart of capitalism. My guest, Jonathan Tepper, is a Rhodes Scholar, economist, former Vice President of Proprietary Trading at the Bank of America,

and the founder of Variant Perception, a macro research firm, which furnishes with research some of the biggest hedge funds in the world. He's also a friend and a former guest of this podcast. And he co-wrote his book, The Myth of Capitalism with Denise Hearn, who has an MBA from Oxford and is the Head of Business Development at Variant Perception. At the end of this conversation, I asked Jonathan some questions about the Australian housing market, as well as some listener questions. So make sure you listen through to that as well. And yeah, enjoy. You're a bloody legend. Thanks for listening. Enjoy. We are on. Okay, Jonathan Tepper, thank you for joining me. Thank you so much for having me on the podcast.

I really appreciate it. So we are here to talk about your book with Denise Hearn, The Myth of Capitalism. And we'll also talk a little bit about the Australian housing market because you have some very clear views on that. We might get to that towards the end of the conversation. But let's start with a book. I'm so happy to have you on and to speak with you about it because I really think this is a book for our times. It's an incredibly important topic and it's thrilling because it's almost like an economics detective quest where we're piecing together a puzzle that explains a lot of concerning trends that we've been seeing in recent years. And so the first thing I wanted to ask you was, how did you come to write the book? I approached this book, really essentially trying to answer a couple questions.

So I did not know the answer in advance. I wasn't really sure what the book was going to be about. But I knew that there had to be a, one, a problem within capitalism, you know, on a macro level. And then from the bottom up level, I realized that something was just very wrong with what we were looking at in terms of our leading indicators. So Variant Perception, the macro research company that I started with a couple of colleagues, builds tools to tell us where growth or inflation are going to be in 6, 12, or even 18 months' time. And these leading indicators help governments in the sense that if you're worried about what's going to happen in growth, or they certainly help our clients who are hedge funds

and family offices who are wondering whether bond yields are going to be going up, whether stock prices are going to be going down. And one of the indicators that we have is a wage leading indicator. And it tells you whether workers are going to be getting a pay raise or not. And this clearly matters a lot to companies, given that most of the cost that companies have comes from the wage bill. And it matters a lot to stocks, because if workers are getting more, often that's at the expense of profit margins. And this is just a normal cyclical thing where you get the ups and downs, where profits rise and fall and wages rise and fall. So our indicator has some very sound inputs. We look at things like the quit rate, for example. When employees quit a job, they almost always do it to go to another

job that's higher paying. They almost never quit a job to go to the same paying job. So if you know where the quit rate is, you have a pretty good idea where wages are going. And then we have a lot of other inputs that go in that are similar and intuitive. And what was interesting is about eight to nine years ago, our indicators started turning up a lot, but wages weren't really picking up. And at first we thought, you know what, our leading indicators are so long leading that you just, we just have to wait a bit more and be a bit more patient. So in the book, I talk about going to visit a particular client in Manhattan and some of our clients have grand offices with views on Central Park and they kept on stopping on the wage chart and they're like, your chart's broken. It doesn't really, it doesn't work. And I was thinking like, you know, well, you just have

to be patient. It's going to go up. And, you know, you can only say that so many times before you realize that the chart is broken. And, you know, I have to go figure out why it's not working. And so I started doing loads of research into that. And at the same time, I was getting drinks with a couple of friends of mine, one in particular. And we were chatting about Piketty. And Piketty was saying there's this big flaw within capitalism where when growth is low, returns to capital become very high and returns to labor are poor. And this explains why we see the rising inequality that we're seeing. And people treated this insight that Piketty had with great awe and reverence. And I thought, this doesn't make any sense at all. If you start a company that makes a lot of profit, I'm going to want to go in and

compete with you. And, you know, I'm going to bring your profit margins down. And that's just the way of the world. That's the way capitalism should work, you know, where a profit incentivizes supply, right? So higher prices lead to more supply. And once I started digging into the labor question, I realized that actually there's less and less competition in many industries. And that's one reason why wages aren't going up, because unionization rates have gone down in most developed economies, but certainly in the United States. So the book focuses on the U.S., but the ideas are applicable to other economies. And a second edition will probably internationalize the book. But what's interesting is you have companies becoming more concentrated, so fewer and fewer companies. If you think of it like the World Cup, where you start out with sort of 32 teams and 16 on each side, and then you get

to eight and then to four. And that's really what's been happening with merger waves over the last 40 years in the United States. And really what happens in the U.S. tends to lead and be an example for other countries. So what you've seen in the U.S. is generally happened in most other countries where the Chicago school, we can go into details later if you want, but there was this idea by Robert Bork and others that mergers were good because they created efficiency and scale and preventing mergers was bad because essentially it promoted competitors rather than competition and it kept industries fragmented and small. So what we've seen is this sort of more and more bigger or bigger and then essentially you may call it more sort of collectivized in a sense, right? And that goes a long way to explaining wages in many industries. But it also explains the lack of competition, which is that companies that don't face competition tend to have higher profits, not because they're much better at using their assets or because they have a lot more efficiency, but rather because they just get pricing power. They get power versus workers in terms of lower wages. They get power versus suppliers, so they can pay lower in terms of lower wages, they get power versus suppliers, so they can

pay lower in terms of inputs. And then they certainly have power over the consumer in terms of what the consumer pays for the goods. So the two really tie together. My argument is that Piketty is wrong, one, because there's no empirical evidence that growth and inequality move the same way that he suggests. But even more importantly, the fundamental flaw is that the flaw is not that we have too little capitalism, sorry, that we have too much capitalism, but rather too little, right? So what we need is more competition, more competitors. And if we had more competitors, that would drive wages up as companies compete

for workers. And it would drive inequality down because you wouldn't have these entrenched very high profit margins for monopolists and oligopolies. So let's pull apart some of the things you touched on. Maybe we'll start with that last point. So I must say, when I first heard the title of the book, which is almost a year ago now, I was a little concerned for you because it sounds like you're anti-capitalism for someone who's judging the book only by its cover. But really, there's a distinction to be made by someone who's pro-business versus someone who's pro-market. And you're very clearly pro-market, correct? Yeah. So I'm not anti-business either. I just point out that a lot of the defenses of big business

essentially conflate big business with capitalism and being pro-big business doesn't mean that you're actually pro-competition or pro-capitalism. So I think that if you do care about competition, you shouldn't want necessarily to see very large companies that have come about via mergers that kill competition. What we want is essentially an open playing field. If someone achieves a monopoly by offering a much better service, I'm all in favor of that. But that's actually not to be seen almost anywhere.

And most of the big companies, and we can go company by company if you want, are really the result of mergers. Sure. There's another distinction to be made, which is that what's rational at the level of the individual investor or entrepreneur or CEO isn't necessarily what's good for society. Could you comment on that? Sure. So I start out the book and the introduction in chapter one are both online. If you go to myth of capitalism dot com, I know that it's annoying to buy a book and find out that it's terrible. So I have to make sure that people could read the introduction in first chapter, see if they like it.

And then, you know, if they really do, then they can buy the whole book so that you can find both of those there. And in chapter one, we talk about Buffett and Peter Thiel. They've obviously had spectacular investment returns. They've done a very good job for themselves and investors. And they both love monopolies. So you look at what Buffett's done in many areas. You know, he's invested in monopolies. Peter Thiel as well.

And I point out that basically when you go through all the evidence, which I do later in the book, but the monopolies tend to have some adverse social consequences. In the book I outline, we've already discussed lower wages. So this clearly has a big impact on the well-being of the average person. And they also tend to raise prices. So while that's good for Buffett, he loves his market power, pricing power, this is bad overall for consumers. And interestingly, the consumer welfare standard, which is the doctrine that governs antitrust or has for the last 40 years, which is what encouraged this merger wave, was that we were going to get all these efficiencies and that all these would be passed on to the consumer. The evidence is overwhelming.

The book cites dozens and dozens of studies showing that you get higher prices. So what's good for the monopolist is not good for society. What's good for the monopolist, when it comes to wages, when it comes to prices. And then I also go into the fact that we've seen a collapse in startups on a broad basis. And a lot of this has to do with increasing barriers to entry often erected through lobbying and crony capitalism. And clearly this is good for the monopolist, but it's very bad for social and economic dynamism. And I point out in the book as well that it's bad for productivity. So there's quite a lot of research that shows that companies are most productive when they're in their early phases, essentially leading up until their fifth year. And as companies get bigger and bigger,

anyone who's worked in a big company knows that you need people to manage the people, meaning you end up with essentially more layers of people to manage the people that you have. And also, you know, there's quite a lot of evidence that has been in the book, for example, by Jeffrey West called Scale. And it just points out that, you know, if you want to end up, you know, as revenue increases, you have to increase your employees at a similar rate. And so you don't, while in theory, companies should be able to scale seamlessly without adding more employees, they actually don't. And not all of these people work productively. So I go into quite a lot of research there. And then there's more research showing that it's not even just a matter of size, but companies that are monopolists and dominate their industry tend to spend less as a percentage of R&D

and be less innovative. So there's clearly a cost to society that society bears while the monopolist might extract the high rents. Yeah, before we delve into some of those harms a little more, I wanted to cover like a definitional concept with you uh which is that so you know in the book you talk about monopolists duopolists and oligopolists but sort of for the sake of brevity you use monopoly and monopolists as a catch-all term but there's also a sort of substantive justification in doing that because in effect uh a lot of oligopolists have monopoly style impacts because of their ability to raise prices. And a key step in your logic is that they're able to do this via what's known as tacit collusion. Can you explain that to us? Sure. So if having multiple competitors meant

that you had high competition, then you could say, well, do you know what? If you have an oligopoly with four players, then this is in no way like having a monopoly with one player. And so therefore, who cares whether you go from eight players down to four? And the truth is that, one, there's overwhelming evidence that going below six players means that prices get raised. But then I go into why it is that four players might behave the same way that one player behaves. And in economics, there's a field called game theory. Game theory basically looks at how two or more players might interact with each other. And the classic is prisoner's dilemma. So in prisoner's dilemma, the idea is

that there are two criminals and they're caught as they're about to commit a robbery. And the police or after they committed a robbery, the police then interrogate them. And the question is, will one snitch or rat on the other and tell the police? And so he can reduce his sentence and walk away. And while the other spends time in jail, the worst of all worlds, obviously, is where they both rat on each other, and then they both end up going to jail. The best scenario for both of them is that neither talks or confesses,

and they both either walk away or get a minimal sentence, right? But if you're being interrogated in separate rooms, you have no idea whether your partner is going to be loyal and protect you. So if you play the game once, you might be incentivized to save yourself and rat on your accomplice. But if you start playing this game many times, you realize that

your partner might not be a very good person and you might then incentivize to rat on him. So when you start playing it many times, then cooperation starts emerging because you realize, if we're going to do this many times times we might as well cooperate and make sure that neither of us gets punished sure so in the one round game there's a bad nash equilibrium because uh you know in any scenario the most rational thing to do is to defect because either the other player hasn't defected in which case you take all the rewards or they have in which case you don't want to be the sucker so exactly either player that the the best thing to do is defect but that assumes a world where there's only one game whereas in reality life is a set of games and the same exactly right yeah if you're looking at an industry like you know the what companies want to do is minimize

their maximum loss you know and that was john von Neumann's minimax theory. But basically, to keep it really simple, companies don't like price wars. You know, it's just horrible, right? They lose, their competitor loses. And so you end up exactly where you started with similar market shares, but you've both lost a lot of money in the meantime. And so I go through dozens and dozens of studies showing and specific examples that are colorful, showing that there's collusion in many industries. And it happens in everything from essentially – we've seen it in bread sales in Canada to Georgia broiler chickens in the south in America to airline prices.

And it just – it's everywhere. And because of that, when oligopolies can collude and they can either speak to each other directly, so these are illegal, and there's hundreds of billions of dollars of fines that have been issued for this, and the estimates are that only one in five cases of collusion are caught, but then you have tacit collusion where if you're the CEO of an airline, you can get on your quarterly conference call and say, you know what, we don't really plan on expanding capacity more than 1%. And then the other CEOs are like, oh, great, thank God, you know, they're only expanding by 1%. We will also only expand by 1%. And then everyone's happy days. And so companies communicate with each other fairly openly. There's extensive

literature, and I cite a lot of analysts that discuss this. So it's pretty well understood that getting down to very few players minimizes competition. And so that's why I use the term oligopoly and monopoly interchangeably. So I think there's sort of two broad categories of harms that you identify. And the first is inequality. And that's driven through pricing and wages, the monopoly and monopsony effects. And I thought it's probably just worth saying that, you know, inequality is bad even if you're in the 1%. Because ultimately, vastly unequal societies lead to social unrest, right? Yeah. So if you look at sort of France before the revolution, or Russia before the revolution,

or even look at the rise of populism in the 1930s, which followed extreme inequality in the 1920s, you don't tend to end up with very good outcomes. And my view, you know, I would call myself a conservative, and I'm certainly a free marketer. I think if conservatives don't reform capitalism and pursue greater competition, someone who's not capitalist and not conservative is going to do the reforming and it's going to be horrible. So I think that, you know, Edmund Burke wrote about this and his thoughts on the revolution in France, which is that had the French monarchy reformed and been more flexible, they'd still be around, you know, like the British monarchy. And so the most conservative thing is reform in Burke's mind. And so it's the paradox of essentially conservatism. But I so I definitely agree there. And I think that, you know, clearly you have wages and prices. But another factor is that

stocks are not held equally by everyone in society. And so therefore, if you have a small number of people who own the capital and you have the term robber baron, which was really applied to monopolists in the late 19th century in the United States. And it came from medieval Germany. And the robber barons were essentially barons to pay essentially a sort of tax or a fee to the baron, even though they didn't keep the land up or the road up. And so these were nakedly essentially transfers of wealth from the poor to the rich. And if you think about monopolies and oligopolies, what happens is that the average person doesn't own shares in these companies. They're transferring part of their paycheck to the oligopolist. And then the oligopolist via dividends and lately much more share buybacks is transferring these to people who actually own capital. And so Piketty was talking about low growth driving this inequality. My point is that this inequality is driven much more by the fact that people have a toll road,

essentially, in their daily lives. And it's a form of regressive taxation. Yeah. And also that the low growth is driven by monopolies as well through the harms to productivity, I guess. Yes, but I don't. So I think that, I think low growth is a byproduct of monopoly. I don't think that it's the low growth that drives the returns on capital, which is what he seems to insinuate. Yeah, got it. So why are you so sure that the causation flows from monopolies to inequality rather than the reverse or rather than just being epiphenomenal? So I tend to distrust anyone who has monocausal explanations for answers in social sciences. So I would certainly say that I do mention in the book

global labor arbitrage and China joining the WTO. And I do talk about automation. But this book is clearly intended to discuss one subject, which is the rise of monopolies and oligopolies. And there are other people who have discussed the rise of China and global labor arbitrage better than I could. And so because it is essentially a polemic, I focused on that. So it's not to say that I don't think that these others are important, but it is a factor that's not been considered in depth. And my goal was to make sure that this angle in particular got the attention that it deserved. And I certainly think it's a big contributing factor to the other factors. The second broad category of harm besides inequality

is the political issue. So companies that are very economically powerful can exert disproportionate influence on the political system. And Louis Brandeis, the famous Supreme Court judge said that his famous quote was that we can have democracy or we can have wealth concentration in this country, but we can't have both. And you quote some amazing stories in the book about the very close relationship between Google, for example, and the Obama White House. And I was wondering if you

could comment on that second broad harm of what monopolies ultimately do to the political system. Well, I think that this is something that's been looked at for some time, sometimes by political scientists, sometimes by economists. For example, Stigler wrote about regulatory capture. So I'm certainly not the first person to do it and would never claim credit for that. What I have tried to do is really discuss what Adam Smith was talking about. So Adam Smith said that men of a trade seldom get together if it's not to sort of collude. But he also talked about the fact that people who are monopolists and people of the same trade will then try to influence government. And so he did not want – when he talked about the invisible hand, he was talking about the marketplace itself independently setting prices.

And what he feared was the government then operating on behalf of the merchants to set prices at the wrong level. And one of the things that we see, obviously, is that because everyone starts out as David and then becomes Goliath, what they often do when they get economic power is they pursue political power as well to make sure that the laws and regulations are fashioned to support their own businesses. And so you end up with extensive amounts of lobbying that make sure that any new laws are favorable to them. If you have regulatory bodies that are meant to regulate them, like the FTC or the FCC, these are then – they'll lobby those. And so you end up with, one, campaign contributions to legislators, but you also end up with a revolving door at the regulatory authorities. So, and in the case of the FTC specifically, it does rely often, and courts rely on economic papers and theory. And because of that, Google in particular, but others as well, have had a massive funding campaign to fund

people writing papers on antitrust and making either new or novel arguments about how it's wonderful that people are handing over all their private data to Google, which is giving them a good service, or essentially attacking the very notion that government should do anything about monopolies at all. And so that's why some industries have gone down to two players. If you look at the beer industry in the US, 90% of the market's controlled by two players. And so you really have this basically an orgy going on between the regulated and the regulators. And so they go in and out of government from one to the other. And it's practically indistinguishable. You know, when you get a

new president, you're just basically swapping people in and out through Washington law firms. And that explains, I think, to a very large extent, why we see the problems that we currently have. In a context of light antitrust regulation, are monopolies inevitable in a capitalist society? I don't think so. I think, in fact, quite the opposite. If there were fewer barriers to entry, and I have an entire chapter on laws and regulations which act as a significant barrier to entry, but if there were fewer barriers to entry, you would see more competition. A lot of the barriers that we see are regulatory in nature. They're legal in nature. And one of the examples I use in the book is the Glass-Steagall Act was 35 pages and Dodd-Frank is 2,200 pages with thousands more

pages delegated to rule writing committees. And we've seen almost no new bank started since Dodd- Frank was passed. So it clearly is a huge barrier to entry when you get big laws. So in a capital system, there's no reason why you should end up with monopolies. If you have a very high level of profit, I will want to compete with you. There are some industries that are natural monopolies, for example, like local water utilities. That's one. And those tend to be regulated by governments to cap the return on assets to make sure that, you know, you're not held hostage just because you want to turn the faucet on and not die of thirst. Right. So regulation exists for a reason. And to the extent of any industry is a natural monopoly, it should be regulated. through dozens of examples in the book, where you have very high industrial concentration and monopoly-like status or tight oligopolies, where the barrier to entry is often either regulatory or basically scale is important. And the regulator, by allowing mergers to happen,

has essentially made it almost impossible for there to be genuine competition by taking the players out. Sure, yeah. But I wonder whether there's something qualitatively different about the tech giants now that makes – I'll use an example. Have you heard of Anavo, the Israeli analytics company that Facebook bought? Oh, yeah. So Facebook has basically bought quite a lot of competitors. And Onabo basically provided a VPN type service where, you know, you could reduce the data that you were consuming and then also essentially hide or connect remotely to data or different servers. But Facebook wanted it because what they wanted to do was to, one,

spy on people. I mean, Google and Facebook's entire business model is surveillance capitalism. It's purely based on spying on users. I mean, they basically put the Stasi to shame as incompetence. And what they want to do is find out what are people looking at, what are they seeing, and which apps are they using, right? And then Facebook would buy any potential competitor. The reasoning is sound in some ways. There was Friendster, which died, and then MySpace, which died. And Facebook feared that it too might die one day and therefore wanted to make sure that it was buying companies before they became the next Facebook. So they bought Instagram, which was a competitor.

They bought WhatsApp, lied to regulators, as it turned out, and paid a minimal fine for that. But what's interesting is once they had WhatsApp, then they were able to tie accounts to phone numbers. So you can't just go create loads of spam accounts and they can actually find out that you are indeed yourself and that your friends have WhatsApp on their phone. And they've got basically now the phone book for the entire world. And because of that, your listeners will know that you can't use Tinder or Bumble without having a Facebook account, right? You have to sign in using a Facebook account. So Facebook, through the acquisition of WhatsApp, was able to turn itself into a digital passport essentially and become indispensable in many ways to other companies and startups.

All of this was done because of the green light of antitrust authorities. None of it was necessarily inevitable. So I go through how a lot of these monopolies that seem impregnable, basically, it's the result of regulatory failures allowing competitors to buy each other. In the case of Google, they were allowed to buy DoubleClick. Google did search ads, which was very profitable. But they then were able to go out and buy DoubleClick. Google did search ads, which was very profitable. But they then were able to go out and buy DoubleClick, which did the display ads. And they were able to buy ad exchanges and mobile ad servers. And they essentially vertically

integrated the online ad industry. So we went from having a very competitive online ad industry to basically having now a duopoly between Facebook and and google and it's certainly much more of a monopoly on the essentially search display side and then a monopoly on the sort of social side and all these are due to regulatory missteps that could be fixed yeah i find theavo thing extraordinary because they were essentially spying on competitors and then just picking them off preemptively. And apparently, a lot of the data they got through Inavo was what inspired the WhatsApp acquisition. But you quote a statistic in the book, something like 500 acquisitions by Amazon, Facebook, and Google in the last few years. Yes, and they very aggressively buy competitors.

I think this is bad for innovation overall. If you look at what Google did with robotics, basically it's buy the companies, neglect them, and then sell them off. And it's been terrible for the robotics industry. But it's bad overall in the sense that companies don't grow and compete. They essentially exit and are often killed off by Google and Facebook because while a big one like WhatsApp might grow, what generally happens is these companies are bought to either kill them off explicitly or they're bought. And then we were talking earlier about the problems of very large firms. Good luck seeing your company succeed within a very large organization where all the money

comes from ads, right? If you're not doing that, you're really not part of the core mission. And so that's one of the problems you see with, and I talk about the research on spinoffs. A lot of smaller companies that are spun out of big companies become huge successes. And there's extensive research on that and spinoffs tend to outperform the parents. And so it's generally when small companies are freed from the big corporate shackles that they do well. And so these 500 acquisitions that we're talking about is sort of the opposite, which is, you know, taking extremely talented and innovative groups and putting them inside sort of monstrous organizations that then get neglected or effectively

shut down over time. So I was going to ask you about antitrust, which you alluded to. And 1978, Robert Bork, who had a failed attempt at, well, failed nomination for Supreme Court justice and was part of the Chicago school, wrote a book, The Antitrust Paradox, which became hugely influential and started rolling out through Supreme Court judgments in the consumer welfare principle. And that sort of changed the way that antitrust law and mergers have been approached since. But I think rather than going into that, because we don't have a whole lot of time, I might leave that for readers of the book and instead just get you to talk about the merger waves that have happened since then.

So there's a chapter in the book, which is one of the favorite chapters of readers, and it's essentially a history of U.S. mergers, consolidation, and antitrust, and it ties into the change in thinking that's happened over time. And there's also a brief interlude, which is fascinating, on how the Nazi cartels were inspired by Standard Oil

and then crushed after World War II by the U.S. And then essentially U.S. antitrust was exported to Europe at the time. So that's that chapter in the book, which I hope the readers will really enjoy. That's what people tell me. But fast forwarding, there was a Reagan merger guidelines in 1982, so a few years after the book that you mentioned, they put into practice these ideas, which is to say they loosened the criteria by which companies could merge. There's standard measures the economists look at, which is like the HHI index. That was loosened significantly. They decided that they didn't care about vertical mergers.

So horizontal mergers are like if you are an oil company and you merge with another oil company, that's a horizontal merger. A vertical merger would be where you're the oil company that's getting the oil out of the ground, and then you buy a refinery or a gas station that's delivering the final oil, right? So it's the vertical essentially sort of supplier network or end customer network. And so they basically decided that almost no vertical mergers were going to get challenged, and they were going to loosen the horizontal challenges. So since then, it's kicked off a mega merger wave in every single decade from that point. And if you grew up in the 80s or were alive at the time, and I know a lot of listeners,

your listeners are pretty young and cool, But, you know, like older, older listeners, you'll remember like the movie Wall Street, right? And then there was essentially Ivan Boski. And it was a great book, Den of Thieves, which went to Pulitzer. And you had all these mergers happening and people were then betting on the mergers and you could make money by finding out what merger was going to go through or not. And so that was the 80s. And then in the 90s, the mergers really were essentially because merger waves are often tied to increases in stock prices. So you had this epic bubble going on in the stock market, the internet bubble.

And companies were using their inflated stock to buy each other. And Wall Street loves mergers, right? They get paid when mergers happen, a percentage of the deal. So you had, you know, dozens of billions of dollars, you know, up until like over a hundred billion at one stage being paid to bankers to do these deals. And at the same time, I was talking to you earlier about the regulatory capture and revolving door. You had economists at universities and law firms in DC who were being paid to say that these mergers were wonderful and wouldn't lead to any harms. That continued and there was a massive merger

wave that ended in 07, right before the financial crisis. And then we've basically been in another merger wave for the last couple of years. It looked like it peaked in 2015, went down a little when global growth slowed a little in 2016, and it's taken off again so uh if you think of we were talking earlier like the world cup you're you've gone from all these teams you've knocked out half of them then you knocked out another half and and i think that's one reason why it's particularly acute right now it's because we're down to like the final you know we're in the semi-finals or finals of uh monopoly the game so I might actually make a new Monopoly game based on this. So I'm going to ask you a couple of questions of my own about the Australian housing market.

Sure. And then I've got some listener questions, which I'll fire off to you kind of rapidly. Great. All right. My first question is, as you know, Howard Marks says that being early is another way of being wrong. And you started your famous report about the Australian housing market was in early 2016.

I'm really curious to know. I mean, it looked like building permits had started peaking back then, but credit hadn't really decelerated. So why did you call price falls so early? Uh, well, we weren't specifically calling for price fall starting like that very month that we put the report out in March. We were basically calling for when building permits turned down further, we'd see further price falls, but it was very logical to us that once that turns, it keeps turning, right? That's the experience that we saw in the U S we saw that in Spain, we saw in Ireland. So it's slightly odd that in Australia, the building permits peaked and then turned down and then turned back up. And now they've turned back down again in earnest.

And so that's one thing that led us to be too early and as Howard Mark said, wrong. But the main point is that the work that I did with my friend John Hempton, even though I wrote the report and wouldn't want to blame him in any way for whatever ideas are in it, the work that we did showed that lending standards were terrible indeed. And it was the Royal Commission really that's brought that about. So lending continued after the report came out. And generally prices don't start turning down until mortgage credit starts tightening. So what we've seen is a tightening cycle by the Fed, which is then translating into higher funding costs for Australian banks. And at the same time, the Royal Commission is squeezing the borrowers because it's making it

much harder for banks to lend to them, given that they now have to properly identify income and costs in a way that they were not doing and that John and I discussed and we saw on the ground. So right now you are seeing price falls and the leading indicators of credit, mortgage availability and building permits are all terrible across the board. Yeah. So my second question is related to something you just said. What's interesting about this current downturn is that it's mostly, I mean, you mentioned the cost of funding for the banks, but mostly this downturn is regulatorily driven by the

Royal Commission, not by interest rates. Have you seen any house price crashes that have been sparked without interest rate rises? Not that I can think of. Because generally what happens is when housing booms, the economy does well. Inflation rises, central banks hike. So the euro area was seeing increase in interest rates. And the US did too. It was an increase in real rates that really ended up

causing a problem. The US also had a mortgage reset wave as people went off the sort of interest only period and started paying principal. Australia is very similar in the sense that a lot of the interest only mortgages are not getting refinanced. All right. I'm going to throw some listener questions at you. I've got about 10 here that people have sent in. I might not ask all of them. It's a mixture of questions relating to the myth of capitalism or the Australian housing market. So first one from Anna Earl. She says, I have one. If the US does something about their IT monopolies, how do they then compete with Chinese ones like WeChat? Or is that not really a problem in Jonathan's eyes? So I think that the Chinese companies have a very big local advantage, primarily because they just keep foreign companies out. They basically have almost no presence in the US. So like they're starting from a very, very low starting point, even if you end up with significant competition

to Google and Facebook. So I think people vastly overstate the ability of Chinese firms to operate outside of China. John Spitzer, in relation to the Australian housing market, asks, Jonathan, are we in full-on crash mode in six weeks or six months? Possibly a false dichotomy there, but I'll leave that to you. Well, house prices don't move very quickly. It's not like the share market, right? You just don't end up with moves on a daily basis. And so I think to say that, you know, in the next, well, one, we're already in one, I think. The issue is obviously how quickly does it move? And even people who, you know, said that I was wrong and were very

critical of me, I've been seeing this week on Twitter, they're calling for a crash and for rate cuts by the RBA, right? So it doesn't take a lot of pain to get Australians begging for rate cuts to keep house prices high. And they describe themselves as a century full on crash if it continues. But these things take time and it takes time to go down. And house prices in the US and Ireland and Spain didn't bottom for quite some time after the stock market did. Yeah, it's about five to six years in each case. Illiquid markets, high transaction costs, information cascades. Peter Rayner asks, what's stopping the banks from ramping up the loose money loan supply again to halt and accelerate house prices once more?

I think it's very much the regulator. I think in the case of Australia, ASIC and APRA have been captured over quite a few years. It really took the Royal Commission to get them to do their job seriously. But I think that now that they've started, I think it would be difficult for them to immediately do a 180 degree. And I think that you find often with government institutions, because they move so slowly, they're more like oil tankers. But there's, I mean, they could loosen it, you know, China, for example, is one that's very top down. And they'll go from tightening credit to just stepping on the accelerator and increasing money supply by 25% in 2016. Just because why not, you know? Yeah. in 2016 just because why not you know yeah australia does not strike me as being a top-down

uh you know economy like that where they can just step on the accelerator you know due to a bureaucratic fiat yeah i'll do one more listener question um so andrew baker asks what's the most common feature of a bubble and what's the longest one jonathan has seen? So the main feature of bubbles tends to be price feedback. So essentially, you know, people trade, like future prices are based on past prices, and people are essentially extrapolating gains. And the rate of change today is highly correlated and impacts the rate of change tomorrow. And so you saw that in the Japanese bubble in the 1980s, you saw that in NASDAQ. And that's why prices become essentially disconnected from reality, because people aren't really basing it on something solid underpinning it and holding it

back down towards reality. And instead, they're basically chasing yesterday's price and extrapolating that ad infinitum. Bubbles can go on for quite some time. So I would say the Japanese market probably was pretty long. That was over a decade in the making. And they were already having pretty high returns in the late 70s. But really, it went on until essentially December 89 is when it peaked. And that was pretty much all the 80s. So I'm very grateful to everyone for writing in. I'm sorry we didn't get to ask all of them. But if I could take five more minutes of your time before we finish, I wanted to ask you just some random questions.

Are you ready? Absolutely. Go for it. All right. Apart from this one, obviously, what podcasts do you listen to? In general, I don't. It's not to say that I'm a hypocrite because I appear on them and don't listen to them. I think I like to read quickly and I like to get my information by reading.

If someone gave me transcripts of podcasts, I'd probably read that. But I just don't like having audio in the background going on for an hour. But you know what? People learn differently. I have friends who only listen to audiobooks, right? And they love that. That's just not – I read on a small screen and I speed read and I can – I try to read about 100 books a year. I probably – some years I do a little less.

Some years I do a little more. I'm very visual and I need to look at the screen so podcasts just don't don't really for whatever reason do it for me one of your favorite writers is gk chesterton which of his books do you recommend for people to start on his his works oh dear um so i mean basically he's extraordinarily quotable right he's he's sort of like Mark Twain or, I mean, or H.L. Mencken. I mean, any sentence is extraordinary. But no, I came to, I came at G.K. Chesterton through basically my parents. My parents were Christian missionaries, and they worked with heroin addicts in Spain. They started a drug rehab with some Australian missionaries, Lindsay and Mike McKenzie. And so my parents would read to us like St. Augustine's City of God at the dinner table. And so one of the first books I remember being read to me when I was like 10 was G.K. Chesterton's Orthodoxy. And it basically is a sort of defense

of the Christian faith. And it's very well written. It's very interesting. But he also wrote a lot about capitalism. And he was behind the ideas of distributism, which was the idea that you need to get more shares into people's hands. And he was very much in favor of smaller businesses. And there isn't really a book for that. What he did was he wrote about this in many essays and writings. So he was really sort of a polymath. Um, and, and, uh,

there isn't one book he wrote on, on capitalism that I would recommend, but I will, uh, send you probably more links to specific pieces that he wrote. Great. We'll, we'll link to those. He, he reminds me a lot of Oscar Wilde as well in terms of his quotability, but apparently he disliked Oscar. Yeah. Well, I think loads of people disliked him, either because they genuinely did or because he was so talented that it's infuriating having someone like him roast you. That's right. How do you manage your social media use?

It's the paradox. I think that to write this book, I had not used Twitter for about six months. And I think if any of your listeners have lots of work to do that's serious and requires deep thinking, they should just turn it off and stay off it. But at the same time, I do enjoy the community on Twitter. I've made many good friends on Twitter. And I think it's a great way to get information quickly. And also, it's a great way to get information quickly. And also, it's a great way for me to communicate to readers. And so I think it's a necessary evil. And the question is just to sort of try to take it in doses, you know, and have windows in which you check Twitter during

the day, and then don't check it the rest of the day, you know, you know, you don't, it's not like crack, you don't need to, you know, be like, uh like like a rat you know pressing on the lever to get your twitter hit every five minutes yeah try and bundle a great book is on deep work by cal newport that'll certainly change your minds i definitely uh recommend that and you know going somewhere and isolating yourself physically is also good you know i did part of the writing for the book in Tel Aviv. I've got some very good friends there. And I would just go and write for a week or two. And you get no distractions and it's great. That's awesome.

And finally, so I think you turned 40 this year. No, 42. Oh, 42. So how do you think about milestones like that and getting older or does it not cross your mind at all? Well, I think everyone thinks about it. But no, I think life is much more qualitative than quantitative. I think that there are step changes rather than gradual ones. So, for example, going from high school to college or going from college to your first job, starting your own company.

Those are things that are big milestones, I think, that are qualitatively different. Going from 40 to 41 is not a big deal in my mind. I think that there are certain life events, like the death of my younger brother or the death of my mother. These are the kinds of things that make you much more aware of your mortality and age you a lot more than passing any particular milestone. And I think that for your listeners, it's probably very similar where there are certain key moments and events in your life that make you younger or older. And it's really about being attuned to those. Yeah.

As Montanya said, it's not about the duration. It's about how you how you use it i completely agree great essayist yeah well look thank you so much my friends it's been great speaking with you and uh this this book that you and denise have written is um you know beautifully written so thoroughly researched and incredibly important for this moment in history. Well, thank you so much. I'm very grateful for your kind review and it's an immense pleasure being on the podcast with you. Thanks very much for listening, guys. You're all legends. If you

want links to anything we discussed, as well as Jonathan's book, The Myth of Capitalism, you can find them on our website, thejollyswagman.com. And I will be speaking to you again very soon with another fantastic guest and a fantastic conversation talking about important things here on the Jolly Swagman Podcast. And of course, if you like what we're doing, please don't forget to rate and review us on iTunes. Everyone asks for this, don't they? Don't they? they yeah get out there and do it we need it we need it costs so much money to do this and we don't charge just rate rate and review that's all i ask all right well i'll speak to you next time and you stay classy san diego ciao