Regular readers will be more than familiar with my friend and fellow blogger Christopher Joye, emeritus General Manager at Rismark and creator of Australia’s leading house price measure, the R.P.Data/Rismark Home Value Index. We might also recall Mr Joye as Australia’s leading bullhawk, that curious breed of animal that simultaneously embraces both higher interest rates and house prices.
Mr Joye has proven himself a resilient presence in the Australian housing market, so much so that having offloaded Rismark to Macquarie Bank he has more recently popped up on the board of Yellow Brick Road from whence, in conjunction with Mark Bouris, he has launched a masterful campaign to muscle in on the big banks protected mortgage racket.
The secret of Mr Joye’s longevity and success is a quick mind and finely tuned sense for public relations. There are few other Australians, certainly none that I know of, that could be said to have gotten under the skin of Jeremy Grantham, the legendary US investor. Yet it is a claim that Mr Joye can fairly make, more so after the release of GMO’s quarterly newsletter last Friday.
In his recent missive, Grantham outlines something of a ten commandments for investment success. Number one on that list is as follows:
In investing Santayana is right: history repeats and repeats, and forget it at your peril. All bubbles break, all investment frenzies pass away. You absolutely must ignore the vested interests of the industry and the inevitable cheerleaders who will assure you that this time it’s a new high plateau or a permanently higher level of productivity, even if that view comes from the Federal Reserve itself. No. Make that, especially if it comes from there. The market is gloriously inefficient and wanders far from fair price but eventually, after breaking your heart and your patience (and, for professionals, those of their clients too), it will go back to fair value. Your task is to survive until that happens.
Now, the “permanent high plateau” reference has a long and ignoble history. It was made (in)famous by the twentieth century economist, Irving Fisher, who, according to Wikipaedia had his reputation:
…irreparably harmed by his public statements, just prior to the Wall Street Crash of 1929, claiming that the stock market had reached “a permanently high plateau”.
Of course Fisher (who also invented the Rolodex) went on to become one the most celebrated economists of our time doing pioneering work in the area of debt-deflation, based upon his personal experience.
Grantham no doubt has this episode in mind when he refers to those making claims that a particular market has reached “a new high plateau”.
But, it is perhaps not too much of a stretch to think that Grantham also has Chris in his sites. Let’s not forget that it was Mr Joye himself who, 16 months ago, undertook the great bullhawkian migration and rode a trans-Pacific thermal all the way Boston to deposit the following challenge at Grantham’s door:
Christopher Joye, an Australian property market bull[hawk], yesterday offered US guru Jeremy Grantham a $100 million bet on house prices.
Mr Joye, managing director of property research group Rismark International, challenged his equally vocal sparring partner, GMO Capital founder and chief investment strategist Mr Grantham, to put his “money where your mouth is” on the issue of whether Australia really is in a property bubble.
Mr Grantham’s downbeat views on Australia’s home prices were “sensationalist and spurious”, Mr Joye said.
He challenged Mr Grantham to bet the $100m over a three-year term, basing the outcome of the bet on movements in the RP Data-Rismark Australian Capital Cities Dwelling Price Index.
For every 1 per cent rise in the index, Mr Grantham would pay $1m, Mr Joye said. But for every 1 per cent decline in the index, Mr Grantham would receive $1m.
We might also recall that Mr Joye is the author of the “permanent high plateau” thesis for Australian housing (happy to be corrected if someone else wants to put their hand up), best captured in the following chart often produced by the lord of the bullhawks himself:
So, what are we to make of this clash of the titans? We must first observe that in the terms of the bet outlined by The Australian (which doesn’t mention that Mr Joye was offering to find a counterparty to take to bullish side) is down some $4.5 million. A sizeable sum, blunted at least, by the rise of the Aussie dollar!
But of course the bet is not yet half over. There’s plenty of time to avert the swan dive, as Chris himself described recently:
The recovery in housing activity, which seems to be occurring more rapidly than perhaps even I forecast, is entirely understandable.
Australians have benefited from a tremendous improvement in housing affordability. Capital city house prices have not increased since May 2010. In fact, they have tapered by a cumulative 4.5 per cent (one bad day for the sharemarket!). At the same time, disposable incomes per household have risen by around 14 per cent. On a longer-term basis, Rismark’s analysis suggests that disposable incomes per household have outpaced capital city dwelling prices by more than 15 per cent since the end of 2003.
Permanently higher plateau anyone? With such affordability on offer it is perhaps, as Mr Joye infers, only a matter of time.
Hopefully less than 20 months, though!
As usual, Grantham’s full wisdom is worthy of your time:
