In November of 2010 Australian economist Christopher Joye put out a challenge to legendary investor Jeremy Grantham on the direction of the Australian property market to the tune of $100 million. (read article here)
The 'bubble king' who accurately predicted the 1987 crash, the dot com bubble and the 2007 global financial crisis had some thoughts on the land down under with regard to it long term historical values and it's potential risks.
"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or …7.5 (times). "Australia is having one now. You are at near 7.5 times family income…which suggests you are twice the size that you should be."
Joye challenged Grantham to effectively put or shut up by placing a $100 million bet on the direction of the Australian housing market as stated below
"This is the deal. Rismark believes it can likely facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market".
Rismark an investment and advisory board which Joye founded in 2003 would be the broker of the transaction. Of course Joye wouldn't be party to the transaction himself rather stating that
"We believe we have counterparties that would likely be prepared to contract with him. But it may take several months to facilitate (and cannot be guaranteed)".
Joye went on to say:
"Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk"
Really? This whole scenario seems a little on the nose and worthy of some further explanation.
First, it seems quite strange that Joye believes that he potentially maybe could nay likely have got a deal done with counterparties willing to contract with Grantham... and yet the deal could still take several months to set up - but is not guaranteed???
OK Joye was that your close? I can't be sure but I'm guessing you didn't receive contact from Grantham... I think?
Grantham is the 'bubble king' - do you really think that he would make comment about a potentially huge windfall knowing his comments carry weight without first being well invested himself??? Joye you can rest assured Grantham is and has been short Australian property for some time and through various means. You should be reminded that there are many ways to bet against the Australian property market indirectly which may include shorts on the Australian banks or the Australian dollar. I'm not sure if playing your index would be Mr Grantham's style, do you?
Then there is Mr Grantham's investment strategy which has built into it that prior to bursting all markets go through a short but exponential phase of growth as outlined by the following article published in April 2007 - his timing was the stuff of legend.
http://www.thestreet.com/story/10353243/1/jeremy-grantham-all-the-worlds-a-bubble.html
On the other hand why is someone like Christopher Joye trying a one man shadow boxing exercise with Grantham? Did he ever genuinely expect a response? Was he short on business with his market making property index or simply looking for some good publicity... I don't have a problem with all the above if that's all it was but is this what Joye's challenge was really about?
Joye's personal interest in the Australian property market maintaining high price levels goes well beyond the 'my prediction's better than your prediction' banter that is not uncommon in the Australian financial sector. Specifically, Joye with his colleague Professor Joshua Gans were the brainchild's of the now adopted 'Residential Mortgage Backed Securities' program in which the Australian Federal Government have now invested approximately $16 billion.
In effect this program is a highly interventionist program designed to provide liquidity to the market in times when liquidity or credit is hard to come by in order to prevent the credit markets and thus housing market from deflating.
Joye himself has stated that:
"We argued that in extraordinary circumstances the government needed to invest directly in the RMBS market to vouchsafe the “public good” of a minimum level of liquidity". (see full article)
In effect the RMBS program is about supporting markets artificially which would otherwise have the outcome of different borrowing decisions by those going to the market. This is a moral hazard as it leads to the misallocation of capital based on what people think the market is telling them and by what is reflected in interest rates and property values and any distortion of these messages to the market is wrought with danger.
Joye is happy to critique Grantham's basis for an Australian property bubble based on multiples of income and sites the Reserve Bank of Australia as support for his low ball numbers of property values being 4.6 times annual salaries ( if this is the case then show me the properties and we've got a deal...)
"Furthermore, this 4.6 times estimate has been independently verified by the Reserve Bank of Australia, Goldman Sachs, Westpac, CBA, ANZ, HSBC and other third-parties".
Of course readers should note that the RBA is in the confidence business whilst other supporters of these figures are the Commonwealth Bank & Westpac, the nation's two largest retail banks who stand to lose the most from the property market bursting in Australia.
It's also interesting that Joye would site the RBA figures but neglect the advice of the soon to be replaced 10 year Reserve Bank Board Member in Professor Warwick Mckibbin who has been voicing his concerns about an inevitable property crash in Australia for sometime.
No doubt it is one of the reasons for Mckibbin's non reappointment to the RBA board - the Government needs everyone propagating the same message, out of frustration Mckibbin felt that he needed to go public which to his credit he did as reported in the 'The Australian' in January, 2011.One of Professor McKibbin's more recent interviews again in The Australian confirmed his views but apparently Joye doesn't take kindly to views that differ from his own when stating in one of his recent blog posting that there is a:
"lot of complete crap sprouted about Australian house prices from folks who really do not know what they are talking about" and then followed up with his conclusion of:
"you genuinely should seek medical advice if you are convinced that house prices are plummeting".
Is that so Joye? Mckibbin was a man who has had an inside view at the crucible of monetary decision making power and yet he doesn't have a clue? A man who was only recently privy to 5 highly confidential economic papers on the state of the Australian property and economy and in which the RBA won't release doesn't have a valid if not credible perspective?
Charles Mackay in his classic writings of 'Extraordinary popular delusions and the madness of crowds' stated that:
"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one".
It seems Joye is the leader of the 'no property crash flock'.
Joye is willing the property market to stay afloat in Australia, it must in order to further his own professional credibility given the depths and scope of his invested interest. The great thing about markets, even the highly interventionist and regulated ones is that what you can delay, you can never deny.
Mr.Grantham should take the Joye bet and knock him out of his conflicted and delusional ways.