A Conversation with Former RBA Governor, Ian Macfarlane AC

21.11.2025

In this Special Edition of SB Talks, CEO Vincent O’Neill is joined by former RBA Governor and Stanford Brown Investment Committee member Ian Macfarlane for an in-depth discussion on the global economic outlook. Together, they examine the US economy’s performance, the impact of shifting tariff policies on inflation and growth, and the strength of equity markets despite policy headwinds.

Ian also offers his views on the extraordinary surge in AI related investment, the risk of exuberance creeping into financial markets, and why elements of today’s environment echo some of the most significant bubbles in history.

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Transcript

Vincent: Welcome to SB Talks. Today is Thursday, November 13th, and I am joined by Stanford Brown, Investment Committee member and former RBA Governor Ian Mcfarlane. Welcome, Ian.

Ian: Thank you.

Vincent: Now today, Ian and I will be discussing the economic picture in the Post Liberation Day era, financial markets, and AI exuberance, as well as where to from here for the Reserve Bank of Australia. Welcome to all our listeners.

The last time we recorded in May was not long after Liberation Day and the economic and market disruption, which followed, and we have to start with your assessment of the US economy today as well as the markets.

Ian: Well, I thought you would suggest that because there’s no doubt that everything seems to start at the US these days. It’s the biggest economy. It’s grown faster than most others over recent years. And of course, it’s a source of numerous policy changes, almost a headline a day in policy announcements. So, we always have to start at the US and I think the most important aspect of the US are the financial markets.

Vincent: So how have things played out since we last recorded so since May compared to, I guess, what we might’ve expected?

Ian: Well, you’re right. I mean, I’ve gone back and listened to the previous one we did in May, and not surprisingly it was drawing attention to the risks. It was suggesting a probably a weaker outlook, not a disaster but a weaker outlook. Now some of the things that we expected have happened, but there’s one very big one that didn’t happen that went in the other direction, and I’m sure we’ll spend a lot of time on that later in the piece.

Vincent: Well, why don’t we start with what has played out as you might have expected?

Ian: I think I’d start with this. There’s still a lot of suspicion about the US economic policy, and the clearest indication of this is, the US dollar is still 9% lower than it was at the beginning of the year. That’s a big fall for the US dollar, and the price of gold has gone up by an astonishing 55% over that time. So, what that tells us, I think, is that non-US investors at the margin hesitant about the US dollar and piling into gold.

Vincent: What about the US economy itself?

Ian: On the US economy, well, we expected that the tariffs would put upward pressure on inflation, and as well as that they would actually be contractionary on the real economy because as people spent more on the higher priced, imported goods, had less income left over for the rest of the basket. Now that’s happened to some extent. The US inflation is 3%. Most measures it’s about 3%, which is a country with the fed’s target is 2%, so it’s a percentage point above their target. The effect of the tariffs is not quite as pronounced.

Vincent: It’s yet to possibly as first thought, it possibly yet to be fully known.

Ian: Yes, there’s obviously a lot more to come through, but so far, I think last time I spoke, I said that the forecasts were that import prices would go up by about 17%. Yeah. It looks now more like about 13%. And why has that happened? Well, number one, the tariffs keep changing all the time, particularly concessions. People can go to the president and say, I’d like you not to apply those tariffs to these mobile phone imports, they’re very important. So, he says, yeah, that’s okay. They go and, automobile parts, we can’t have high tariffs on that, so oh, well that gets waived.

Vincent: A lot of side deals.

Ian: Yeah, everything’s done by a deal. And as well as that, I think the rest of the world, the exporters into the US have learned how to play the game. And so, a higher proportion are sourced from countries that have lower tariffs than China. As a result, the effect is not quite as big as we thought, but as you say there’s probably more to come.

Vincent: What’s your take on the real economy, so, you know, economic output, the labor force?

Ian: Well, the first thing I have to say is the data is not very up to date because of this shutdown of the US government just reopened yesterday. So for example, we don’t have GDP figures more recent than the June quarter.

Vincent: How would you have found that to operate in that sort of an environment?

Ian: Well, there’s so many different indicators. You’re not really dependent on any one. But, GDP, for example, in the US what we do know is that in the first half of this year, 2025, it grew at about 1%. Which is a good deal, lower than the second half of 2024 when it grew at 3%. What it’s doing just at the moment, we’re not sure. I think it’s going to be a bit more than 1% because of this sudden huge lift in business.

Vincent: Fixed investment into one category, data centers.

Ian: Now similarly on the labor force, we haven’t got the most recent number that we would normally have, but the run of numbers before that. Plus, a lot of private sector data suggests that, employment is growing very slowly. It’s not declining, but it’s growing very slowly.

Vincent: Some people have characterised the US as being a no higher no fire economy, with a lower flow of people into the country, given the change in immigration policy that may have had an, it may have had some effect, but I think it’s the impact is significantly beyond just that as a factor.

Ian: I don’t know, I’m not close enough the number to answer that, but I think it’s pretty clear that sort of middle America and lower America is not doing very well. Apart from Silicon Valley and Wall Street, the rest of the American economy is growing, but it’s disappointingly slow. It may pick up but certainly that the financial part is grossly overheated and the real part is struggling along.

Vincent: Somewhat subdued. You’d sort of broadly categorise that in, probably the expected or the, potentially the headwind of tariffs could have a headwind on the economy. And that’s somewhat playing out as you expected with a few exceptions. Maybe we move on to what didn’t turn out, as you might have predicted.

Ian: Well, we all know the big thing that surprised, well, certainly surprised me and I still can’t, I still have trouble coming to terms with how we could have had such a massive increase in the share market. It’s up, I think 38% since

Vincent: 38% since its lows in April. Yeah, since, since it’s low and, and about, that’s only six months ago.

Ian: And I think it’s, what did I say? 16? About 16%, 6% since we last, since the day we recorded the last, yeah, since we last spoke. 16%. Now that’s huge. Very hot for a year. It’s even bigger for a period of three months or six months. And you know, I think I’ve had to struggle to come to terms and try and explain it. Now, there are some very general things that, always surprise you about just how optimistic US investors always are, and there’s one really big thing which we’ll come to afterwards.

Vincent: Well, what’s your take, on just that thematic of the broader optimism of US investors full stop.

Ian: Well, I mean, part of it is momentum because over long periods, but let’s say recently it’s the post COVID period. Everyone who’s stuck their neck out and plunged in and taken a big position, has done pretty well. And those people who have been more cautious or skeptical, haven’t, they haven’t done as well. So, the message that’s sort of coming through all the time is, you can’t go wrong if you take a long, you know, a big position. And the other reason why they think they can’t go wrong, is there’s a long history in the US, well not that long, maybe three or four decades, where if something did happen and the crunch came, you knew you were going to be rescued.

Vincent: The bailout.

Ian: Yeah. And, in my time it was always referred to as the Greenspan put, and so the Fed was the main. Body that was thought to be the one who would bail you out. But in the GFC for example, the government came in and it bailed out. The main ones that bailed out was American Insurance Group. I think frankly they had to do that, but that’s another story and they bailed out General Motors and Chrysler. And so I think people sort of think that, there might be a bit of pain, but there won’t be much pain. In other words, the downside, has been buttressed and the upside is that there’s no limit on the upside. So I think that’s the mind of the American investor.

Vincent: That’s sort of fed into the psyche there in terms of the, the tilted of the odds. What about the role of interest rates? The Fed easing well is adding fuel to the fire?

Ian: Absolutely. I mean, the Fed funds rate’s 4%, inflation rate’s 3%. Now to me. Even if I didn’t know anything else about the economy, I would say, well, that’s 1% real interest rate, that that’s not very tight. That’s pretty relaxed, sort of monetary policy. And then when you say on top of that, we got a share mark that’s going through the roof. We’ve got credit mark where, the margin for risk is as small as they’ve ever been. In other words, financial conditions are as expansionary as they’ve ever been. Why are people expecting the Fed to come along with another interest rate? Cut, but that seems to be the mindset in the US. What do you think is driving that? I just think it’s misplaced, belief that somehow interest rates at 4% are high. They’re high compared to that period, between the GFC and COVID when they were almost nil.

Vincent: But they’re not hired by any other historical comparison. They’re still quite low , but there’s a generation grown up in that environment. Instead, it’s borrowed and purchased their first properties in that environment. Yeah, I think

Ian: That may be, yeah, that’s probably it. And of course, the thing that makes it worse is that, not just what will the Fed do, it’s what would happen if Trump managed to stack the Fed. And with his appointees in which case, you would have a very major expansion in monetary policy or reduction in interest rates into this overheated financial environment that concern you? Oh yes. I think it would go off the rails reasonably quickly. I think one of the few things that’s holding back, the US financial system from going crazy is that the Fed is still independent.

Vincent: Trying to at least keep one hand on the break. Now you talk about exuberance in the market and the Fed. Obviously, what we haven’t mentioned so far, the elephant in the room, AI. What’s your thoughts on that? I guess I respect and sort of stepping out of monetary policy here, but I’m talking about exuberance in the markets and confidence and all these things fitting in.

Ian: It is obviously a huge amount of money flowing into AI. Which means both the AI companies and the infrastructure that is going to be built on, which is these big data centers.

Vincent: Yeah, which are enormous. So, Nick and I recorded a podcast last week and he talked about just among the major companies, there was a sort of three 50 to 400 billion expenditure rollout for 2026. And their expectations and projections for 27 and 28 were multiples beyond that.

Ian: Yeah. The bit that is also a little bit worrying is that normally things at the cutting edge, the fringe, you know, the venture end, it’s all financed by equity, but this, the need here is so great, there’s a lot of credit going in there as well. So, it’s not just equity investors, its credit, and not just credit. There are all sorts of other financing arrangements, which I don’t fully understand, but sort of round robin, I’ll lend to you, if you lend to you and if you buy that off.

Vincent: We buy a portion of your company, but in turn you buy some chips off us type scenario.

Ian: I think, there’s no doubt it’s a bubble. I think we’ve got to say it’s a bubble. And there’ve been a lot of bubbles in financial history, and this is quite possibly one of the biggest, for example, I think, you know, one measure is PE ratio. I think it’s only been higher in the .com bubble. In fact, it’s slightly higher now than it was in 1929. And the other thing of course is as I mentioned, the risk margins are about as low as they’ve ever been. So, to me, it’s a bubble and it’s not, controversial. I don’t think to say that it’s not as though I’m the only one saying that. I think nearly everyone’s saying that. That’s, the curious situation we’re in and even some of the tech bros from Silicon Valley are saying it,

Vincent: Talking down their own share prices upon occasion. But I guess in a bubble, some things as, even if you look back at the .com, there were obviously many things that shouldn’t have existed, had no revenue and insane valuations. And there in amongst that group, there were some real businesses that thrived and survived. I think, you know, PayPal, Amazon.

Ian: Yeah. Well, that’s where, the tech bros who say it’s a bubble. And they say, yes, but bubbles are good ‘ cause bubbles get things done, and eventually it has a clear out, well, I mean, of the people that shouldn’t be there. I mean, for example, if we go back, the most famous bubbles were in the US and the UK in the 19th century was the railroads and money poured in and railroads got built. A lot of railroads got built. In fact, too many, some of them duplicated, but they got built. And some people made a lot of money. A lot of people lost a lot of money. The other one that people quit quoting, which is not even necessarily a bubble, but the airline industry, apparently if you had invested in all the airline companies, you wouldn’t have made any money at all. Over 50 years or something. Your losses would’ve equal, your gains. And so, it’s true. A lot of airlines got started and people flew, and so it happened, but people lost money as well as made it. But the difference there is, people knew what a railway looked like, and they knew what an airplane looked like.

But the issue with this current one is we really don’t know much about what AI is going to deliver. Very few people understand it, and even the people who do understand it have differing views about its potential. I mean, is it going to be earth shattering? Is it going to change the world? Or is it going to be just a sort of a useful innovation of medium size, or is it going to be a disappointment now? Secondly, that’s the first thing. The second thing from the investor’s perspective, even if it is a success, who’s going to get the profits out of it? I think they’re assuming that there’ll be either one or very small number of big winners out of it. But it may not be, it may be that most of the benefit goes to the users or there’s multitude of providers and there aren’t any network effects.

So, the thing is no one knows the answer to any of those questions, but they feel, I think that they have to work on the assumption. That this might be the biggest technical innovation ever, and it might lead to a flow of profits that ends up at the hands of a couple of companies. And so, you have to be in the race. You, you know, it’s a winner take all situation. Most of the people lining up to be big names in AI will fail, but possibly a few of them will make massive profits. We don’t know whether that’s going to happen. We don’t, but that might happen.

Vincent: Yeah, we spoke to it on our podcast last week, and it’s quite interesting. You could almost divide them into three main categories you have. I guess you’ve got this huge data center spend. And, you have the likes of, say, Google and Microsoft. Well, they could sell cloud as a service, so they’ve got at least some pathway to know, and if we build this, how do we monetise it and how do we sell that on outside of what the upside now be?

Now there’s a big leap between the level of spending that they’re making and the level of revenue they’ve got to get on those multiples to justify it. But there’s probably more like your railroad example. At least you can see some pathway. Then you have sort of the companies like Meta for example, who, it’s not really clearly obvious how their investment’s going to pay back in terms of better advertising, better spend, but I think they fit into the category of, firms that might just see it as an existential risk. We’ve got to do this, otherwise we won’t exist. And then obviously you’ve got open AI off the other side, which is just a pure AI as a product. Albeit private asset, not in the public markets, but on, on being valued on sort of earth shattering, sort of eye watering multiples there.

But, it is interesting. And I ask you then with that context, and you obviously are a member of our investment committee. How do you think about that? You know, do you paint the case of, okay, let’s go to cash, if there’s a bubble. There’s some, maybe some companies are going to be reasonably valued, some left.

Ian: Well, the first thing is, it’s a situation I don’t think any of us have been in . Where I think there’s such universal recognition that it is a bubble. It’s not just our personal view. You’re dealing in a market where all the other people sort of recognise it is, but they don’t know how long it can last. Because bubbles, it’s impossible to predict when they will end. And I think you can say they will always go longer than you thought. And so, the alternative an extreme alternative, let’s sell all our shares and go into cash.

Vincent: And also, when the bubble pops doesn’t mean everything’s worth nothing at the end of that exercise. Some companies might be and possibly should be, but many will still be all the better for it and viable, albeit they’re going to have a bit of volatility along the way.

Ian: Yeah, there’s some famous examples during the .com thing of funds managers who stayed out of the really hottest stocks and got sacked. Virtually at the end of the bubble, you know, in March 2009. And that was the turning point where what they were predicting is, is going to happen. March 2000 was the peak, and to lose your job, just when you’ve been proved right, must have been absolutely galling. Look, I can’t really give you advice on this because you’ve obviously given a lot of thought to it and probably much more disciplined thought than I have. You can really only adjust some to some extent at the margin I mean, one could imagine reducing your equity proportion of equities, but not by very much. You could imagine changing the nature of the companies in that equity portfolio by country of origin or the industry they’re in. You could imagine at the margin increasing credit vis-a-vis equity but then moving up the credit scale to higher rated credits. I mean, these are the things that I’m sure you are all thinking about.

Vincent: And I think, well, for us it’s the diversified portfolio. So, diversity is absolutely number one. But I mean, even like other asset classes, when you’re looking at things like infrastructure and private credit, not every one of those has its own risks inherent in it. But it’s about saying, okay, if I’ve been in global equities and nothing else for the last few years. Well, it would’ve been a terrific place to be, but probably the value of diversification over the forward looking period is going to be greater than it probably has certainly been post COVID or certainly it’d say post Mario Draggy even.

Ian: No, I agree. Diversification is absolutely number one, but within. A diversified portfolio you can change the weightings a bit, but there’s not a lot more you can do other than sticking your neck out and taking a huge risk, which you might be wrong.

Vincent: Got to path the way through it. You’ve got to set the prudent path on the way through.

Ian: Well, I mean, obviously you’ve been giving a lot of thought to this and we’re having another meeting on Monday where I’ll hear what you’ve come up with. But it is awkward because you really have to go back to the .com boom, which, was roughly the period between about 1995 and 2000. And that’s the similar, I think by the end of that too, a lot of people say, oh, this is a bubble. And it was, it turned out to be one, and this one will too. It’s just a matter of when.

Vincent: Yeah. But again, doesn’t mean that all those technology names that you named are not around anymore. It’s just that their valuations are potentially a bit of a race on the way through.

Ian: That’s right, well I mean, in the .com, the equivalent to the data centers that are being built now, .com, it was fibre cable being laid. Because .com wasn’t just computers and internet, it was also telecommunications. That was a very big part of it, mobile phones,

Vincent: And there was a huge rollout, which they eventually used, but it took quite a few years for them to use up the capacity that they built. If I may, I’d like to step closer to homeland and regarding Australia and your assessment of the monetary policy outlook here. Following the upswing in September quarter, inflation data sort of took significant wind out of the sails for those calling for RBA rate cuts.

Ian: Well, there’s some similarities between Australia and the US, but I think in terms of monetary policy, Australia’s in a better position. You’re right, there were a whole lot of people. Sort of sitting on the edge of their seats, expecting rate cuts every sort of month.

Vincent: Possibly the same psychology that you described in the US as well.

Ian: Yes, yes, yes, very much so. And I think I could see, oh, a month or so ago that the Reserve Bank was certainly Michelle Bullock was not all that enthusiastic about that, and she made a small attempt to sort of hose it down. But then it rekindled again when there was a. Modest employment number in, whatever the most recent month was. And so, she made another attempt to sort of hose it down, and which I applaud. And then of course the September quarter, CPI came out and it’s quite clear that in Australia, like the United States inflation is three point something. You calculate the various ways you can measure inflation Australia.

And it’s three or three plus, whichever way you look at it. And we’ve got a cash rate at 3.6%. Now to me 3.6% cash rate, inflation rate, three point something. To me that is easy monetary policy, and there is no justification in my mind for a cut. And I think we’ve re-entered almost a healthy situation.

And the healthy situation is if you were a governor of a central bank, people think that the cash rate will probably roughly stay where it is, and there’s an equal probability after that that it might go up or it might go down. , And so that’s the way I would characterise it at the moment. But I think we’re in a much better position in terms of monetary policy in the US where there’s still this great pressure on a further easing into financial markets, which are much more overheated than ours are.

Vincent: Who would be a Central bank Governor, Ian? You have to pick your period correctly. I think you stepped into a fairly hot pan as well, yourself?

Ian: Oh yeah. I mean. The worst time would’ve been the seventies. No matter who you were, how good you were,  you would go down and look as though you weren’t very good. If you’re going to be there for 10 years, there’s a whole lot of events will happen that you didn’t expect.

Vincent: No one’s going to get a Goldilocks term.

Ian: No, no. You can’t get a Goldilocks term. You can get a shocking term.

Vincent: Fascinating As always, thank you very much for your insights Ian, and thank you to all our listeners.

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