Ignore the rant but please don't ignore Grantham
3 November 2010
Sean Russo
A FEW people who read my last column, “What’s it like inside a bubble”, described it as a rant. I looked it up to be sure and the best definition of rant I saw was, “a loud bombastic declamation expressed with strong emotion”. Then I had to look up bombastic.
There I saw words and phrases like “ostentatiously lofty in style”, pompous, pretentious. Loud, yes. Strong emotion, yes. But I have to draw the line at pompous and pretentious. I would hope people that know me would be happy with loud and emotional and if they wanted to be pretentious they might even say I was loquacious. I would cop all that gladly but I would really struggle with pompous and pretentious. But while we’re there I absolutely think that those who propose to tell us we are not in a bubble do show strong signs of both.
As children we likely all heard the wonderful Hans Christian Anderson story of The Emperor’s New Clothes. Many of you have probably read it to your own kids. Its message is about the dangers of pomposity, pretention, pride and intellectual vanity. Interestingly the broader story first published in 1837 is based on a story that can be traced back to the 1300s and a collection of cautionary tales from Arab and Jewish sources. We humans have not changed these past 700 years, nor are we likely to in any major way in the next 700. We always have, and always will, commit the same base errors, succumb to the same human foibles, over and over again.
Hans Christian Anderson was a great deal more eloquent than I could ever hope to be but in some way I would hope that the reader of “What’s it like inside a bubble” would cast me as the young boy (I wish) who cried out that the emperor was naked. There is no pretention in my claim that property prices are in a bubble. I simply observe that if first time home buyers sensibly can’t afford to buy I wonder who or what it is that keeps pumping the bubble. I also fully accept, as I observed in Japan in the 1980s, that bubbles can grow for a long time and in fact the Japanese were calling it the Bubble Economy before theirs burst. All the while taking out mortgages for their children and their children’s children; because the fundamental logic at the time of a shortage of land seemed compelling and prices always went up.
Stories (fairy tales) like The Emperor’s New Clothes are passed down from generation to generation to try and remind us of how we consistently err and to help us recognise the signs. Sadly we seem to always recognise them more in others. Perhaps that is why we should listen more intently to those who observe us if we are a bit too close to the action.
Jeremy Grantham is a perfect candidate. He is the CIO of fund manager GMO. He doesn’t need to rant. By all accounts he has a brain the size of a planet. He has a strong track record managing the money of others and in particular is recognised as an expert in identifying bubbles, which is why the owners of more than $US100 billion entrust him with their funds.
Mr Grantham was quoted extensively in June when he spoke on our property market and again in an article over the weekend. “Housing bubble ‘atypical’”(AFR Weekend Oct 30-Nov 3). His first observation was that “Australian housing passed one bubble test spectacularly – because Australians had violently objected to the idea that there was a bubble”. His key question was, “can a cohort of young buyers afford to buy starter houses in your city at normal mortgage rates and normal down-payment conditions? If not, the game is over and we are just waiting for the ref to blow the whistle”. He also said, “in Australia’s case the timing and the speed of the decline is very uncertain but the outcome is inevitable”.
Write my earlier personal observations off as a rant, but please listen hard to Mr Grantham’s question: “can a cohort of young buyers afford to buy starter houses in your city at normal mortgage rates and normal down-payment conditions?” Read it out loud, read it to your kids, stick it on the fridge. Think about it before you lend your child the money for a deposit by drawing down on your own mortgage, or before you encourage them to get on that ladder that has done so well for you. If they don’t think they can afford to buy a house they just might recognise the emperor’s clothes for what they are.
Ignore the future of world financial markets and just think about your long term relationship with them. Remember they will still love you if you don’t help them; they will not thank you if it goes right because they took all the risk and that’s what kids do. But, they will surely blame you if it goes wrong and not only because they are in penury but because you blew their inheritance!
(Any of the above dates, numbers or historical references not in my own head were sourced from Wikipedia).