The Keen Walk to Kosciuszko was a fabulous experience—as Matt Carroll (one of the organizers) put it, it was “the best holiday ever”. That’s not to minimize the effort involved: covering 235 kilometres on foot in 8 days is no mean feat. But the combination of great company, personal success for all involved in an impressive physical challenge, lovely scenery, excellent weather, and a cause that united a remarkable group of people, made The Walk far more pleasure than pain.
(The Walk was also a successful fund-raising venture, generating over $5000 for Swags For Homeless–enough to give 85 homeless people a portable bed in which to sleep–see the video further down. Please consider adding to our fundraising tally by clicking on one of the Swags For Homeless links here)
This wasn’t what was intended of course: The Walk was supposed to be a “Walk of Shame”, as several headlines termed it , for me being “hopelessly wrong on house prices” (“Walk of shame for professor who tried to burst house bubble”; “Walk of shame for economist”). Instead, it turned into a successful protest against the housing bubble, whose existence even RBA Governor Glenn Stevens recently (and bravely) acknowledged on prime time television (“Rates to rise, property speculation a ‘mistake’”).
The Walk had its genesis in a “Vital Issues Seminar”, a series run by the Parliamentary Library to keep politicians and their advisers abreast of competing views on important issues. Macquarie Bank interest rate strategist Rory Robertson and I shared the bill on November 26th 2008 (the month after the Government introduced what I prefer to call the First Home Vendors Boost, with the unspoken objective of supporting house prices–see “Rescuing the Economy or the Bubble?” and “FHB Boost is Australia’s “Sub-prime Lite”“), in what was billed as “Economic futures: two views”. In the middle of his presentation—and without any prior warning—Rory sprang the bet on me in front of 80-100 Parliament House staffers (and some politicians).
Having been caught by surprise, I agreed to it before having a chance to negotiate terms. I subsequently found that I had in effect signed a near blank contract with a banker, leaving him to fill in the details—not something that I recommend anyone do.
Click to donate to Swags for Homeless
Now that The Walk is over, I can revisit a vital issue of my own: what the bet really was about in the first place. Fortunately the debate was recorded, and when Rob Burgess of Business Spectator turned an impartial ear to it (Rob came on The Walk to report it for Business Spectator: click here to read the series), his conclusion was that the bet was that:
Keen must walk to Kosciusko if nominal house prices fall by less than 20 per cent before October 2013. (“KEEN’S DEBT MARCH: Rory’s repudiation”)Needless to say, that’s very different to how Rory interpreted it: his version was simply that the bet was over—and he had won—once prices rose past the peak set in September 2008 (the quarter before he pulled the bet on me). But Burgess’s summary is an accurate interpretation of our discussions that day. If you have the time, you can decide for yourself by listening to the recording; if you don’t, here are the relevant segments, transcribed from the one hour debate (the key passages relating to how the bet should be interpreted are highlighted in bold).
36:35 seconds into the recording: Rory: I think some people here probably came today to hear about why house prices are going to fall 40 percent, so that’s what you’re most famous for at this stage. So what I was going to do, in the spirit of competition or whatever, Steve’s a betting man, he sold his house.. so what I would say is if, I think it was 40 percent on average across Australia, is that what it was?
Steve: Yeah, but over a ten to fifteen year period mate, so…
Rory: so, all right, it’s a long term thing…
Steve: but over the long term I’m willing to stick to it.
Rory: Well how about this? If Australian house prices as measured by the Statistician fall from peak to trough in nominal terms by 40 percent, I will walk from Canberra to the top of Kosciuszko, and if in fact Australian house prices fall by less than 20 percent, so if it just turns out you’re less than half right, … I will wear a shirt saying “I was hopelessly wrong” if they fall 40 percent, you should wear a shirt saying “I was hopelessly wrong” if it doesn’t…
43:50: Rory: The Australian market is down 1.8 percent in the third quarter basically, so take that as the high point for our bet…
58:10: Steve: I think the timing of what we’re going through is quite different to America. On that point about Australia not being as irresponsible on lending, we didn’t lend to the same people … irresponsible borrowers rather, but we lent as irresponsibly to the entire nation.
If you look at the household debt to GDP ratio, in Australia it’s 2 percent higher than in America right now. The ratio here is 98 percent, the American ratio is 96 percent. If you go back to the 1990s, we had half the American’s ratio—which of course was lower back then than it is now. So we’ve been lending to a broader part of the community, which is why you haven’t had a collapse in the housing market straight away.
But what will happen when the debt slowdown strikes and people stop borrowing money, we won’t have the same degree of spending, that will cause a decline both in asset markets and also in employment–in the retail trade in particular cause households are the ones who’ll cut back on spending this time round. A retail led… well, recession would be a polite word for it, a very extreme drop in retail sales, increase in unemployment and then anyone who has a mortgage and no longer has a job will lose the house, and you will then have a credit crunch coming after the event.
So I see the American process as being a housing crisis, a credit crunch and then macroeconomic; we’re going to go through macroeconomic, housing and then a credit crunch after that. And I see it taking about five years. When that hits, then we’ll be in the same situation as the Americans.
59:35: Rory: I’m still only going to give Steve five years to get his 40 percent. (Banter over the top of each other at this point)… I would say that the debt to income ratio that Steve Cites aren’t nearly as important as the interest payments to income ratio, and the Reserve Bank has just cut them…
60:15: Rory: It’s only just begun, right? They cut by 2 percentage points in three months over 4 meetings… The down 2 per cent in Q3 was due to the Reserve Bank’s deliberate effort to crunch the household sector and house prices, and now it’s the Reserve Bank’s deliberate effort to support the economy as much as it can, and the housing market in particular.
Steve: The only way that’s going to work however is they actually encourage Australians to continue borrowing money, because a large part of the demand’s by increases in the level of debt. Now that’s how we got out of the 1973 downturn, it’s how we got out of the 1990s downturn. We started borrowing money again. Do you think Australians are going to start increasing their debt levels again? I’m sorry, I don’t. I think we’re reached a secular turning point, not just a cyclical but a secular turnaround.
In that case, each 1 percent cut by the Reserve Bank reduces the financial burden on the economy by about 18 billion dollars, which is substantial. But if Australians stabilise their debt levels, or try to reduce them by 100 billion dollars a year, that’s five times the scale of each 1 percentage interest rate cut. We can’t cut more than another 5 percent.
67:30 to End: Sharryn Jackson MP (Chairing): We also witnessed of course, the bet, but we might have to clarify precisely what… (drowned out by chatter).. And I’m sure we’ll all look forward to one or both of you wearing a T-shirt saying “I was horribly wrong”…
Burgess arrived at his summary by combining my long term prediction (that house prices would fall by 40% over 10-15 years) with Rory’s time frame (“I’m still only going to give Steve five years to get his 40 percent”). Since Rory set a time frame of 5 years, and my call was for a 40% fall over 10-15 years, a halfway call—that I’d lose the bet if house prices didn’t experience a 20% fall over the five years between November 2008 and October 2013—is a fair compromise between our positions.
So why did I walk anyway, over three years before the bet will be up? Because I realised that if I didn’t, Rory and the property lobby would pillory me for having welshed on the bet as Rory had interpreted it. So the best tactic for me was to undertake The Walk, and turn it into a protest march—after I had Rory agree that, if prices ever did fall by 40%, he would also walk.
In May 2009, the Rudd Government extended the First Home Vendors Boost for another six months and I felt that prices were now certain to breach the September 2008 level. Email correspondence between myself, Rory and Chris Joye in June 2009, evoked agreement from Rory that he would walk if there was ever a peak to trough fall of 40%. Thecorrespondence on this is reproduced at the end of this story: ordinarily I wouldn’t reproduce such emails, but Rory at one point publicly denied that he had any obligation to walk—see “Keen the loser walks”. This correspondence therefore belongs in the public domain.
Now, courtesy of Burgess’s considered interpretation of the bet, if prices fall by 20% or more at any time between now and October 2013, Rory should walk.
The Walk
One thing Rory didn’t know when he pulled the bet on me is that, while a lot of people of my age (57) might have recoiled at the very thought of a 225km walk, it actually appealed to me. I am not in Tony Abbott’s class as an endurance athlete, but I have done the odd 1km swim /30km bike ride / 10km run triathalon (including the now defunct 2DAY-FM series which included a swim across Sydney Harbour), a fair few half-marathons (I’m doing the 2010 one this coming weekend) and numerous City to Surfs.
Steve Keen's Debtwatch Podcast
So I approached the event with a positive perspective, seeing it as a chance to get back into shape, and also do something that few others would have done. I also expected that some of the 4,000 members of my blog (and its roughly 50,000 readers each month) would also find the idea attractive.
So it transpired: once I put the invitations out on the site www.keenwalk.com.au, about 40 people put their hands up to join me for anything from an afternoon’s walk to the whole trek from Parliament House to Mt Kosciuszko. That turned what could have been a very solitary affair into a moveable feast of camaraderie. Overall about 40 people took part in The Walk, including 8 walkers (and several support crew) who made it all the way.
I expected the Keen Walkers to be an eclectic lot, but even I was amazed. There were many IT professionals and some engineers (something I had expected since there are many computer programmers and engineers on the Debtwatch blog), several people from the finance industry itself, an economist, journalists, an ex-rocket scientist, small businessmen, several RAAF personnel, a train driver, and an ex-real estate agent. As well as having the inevitable discussions about house prices and debt, I found myself engrossed in conversations about assembler-language programming, Nelson’s victories in Egypt and Waterloo, quantum mechanics, XML coding, impressionist painting—and frequently simply discussing the beautiful scenery, the physical challenges ahead of us, and the inordinately hot weather.
It did seem that the heavens were smiling on us. I chose late April because I guessed that this would be the best compromise between scorching Summer heat and unpredictable alpine blizzards; as it happened, we had eight glorious days of sunshine and only one day—the final one on the Mountain itself—of wintry alpine conditions. The heat was so marked that we altered the start time for the morning runs from 10am to as close as we could manage to 7am.
Each day began with a hearty breakfast with the entire troupe, followed by a preparatory massage for me from our masseur Ania Pawliszak. Then we ran between 12 and 19km depending on the day, covering the terrain at an average speed of about 10 kilometres an hour, including many uphill legs when I slowed to a Cliff Young shuffle (as in the video above).
The run leg was also far more social than I had expected. I upped the ante on the bet by running half rather than merely walking, simply because the walk on its own wouldn’t have been challenging enough. I expected this would give me a solitary morning followed by a social stroll in the afternoon, but on most days I had four or more co-runners—notably the two Daves (every second person seemed to be called Dave), Adam, John, and my friend and fellow economist Liam. Conversations continued as we huffed and puffed up the many rolling hills on the Monaro Highway.
Then we took between 30 minutes and 2 hours over lunch at one of the many rest spots on the side of the road. Ania again massaged me and anyone else who was having difficulties after the morning run, and we set off once more for the afternoon walk.
Except for the first evening, when we walked over 21km out of Canberra and stopped at the paintball facility on Old Tuggeranong Road, we finished the walk before sunset and had plenty of time to relax prior to dinner. Initially we were somewhat restrained in evening activities, but as the trek wore on and it became apparent that everyone was going to finish, the evening’s dinners became more extended and even more social. I was given a lesson in pool (and pool hustling!) by David Hirst one evening; on another we relaxed in the spa at the Best Western Marlborough Motor Inn in Cooma.
The trip was well planned and marshalled by Matt Carroll—who is the public officer for the newly formed Centre for Economic Stability—and as the days went on, various walkers would take on additional tasks to make things run more smoothly still. Peter Renshaw and his RAAF buddy organised the walkers (who normally left an hour or so ahead of the running group each morning so that we’d finish at roughly the same time for lunch); Dave Lawson became de facto camera man; and prior to the event, Colin McKay arranged and paid for the printing of the T-shirts.
Duncan even became our de facto “Choice” man for Swags, testing setting one up and sleeping in it overnight (or at least until 3am, when the Jindabyne Council sprinkler system turned on!).
Steve Keen's Debtwatch Podcast
The Walk was a wonderful instance of how cooperation can turn a potentially arduous task into a pleasure.
Though I’m sure we would have ultimately tired of the Walk had it gone on for another week or so, by the final day there was a sadness that it would soon be over. The walkers set out early, led by Peter Renshaw and his RAAF buddy (who prefers to remain nameless—let’s call him Duncan), and Dave Lindburg and I set out an hour later for our final run. As usual, Dave beat me to the finish at Charlotte’s Pass; then after a safety briefing by Peter and Duncan, we set out for the 18km return journey to the summit.
I was pleased to be joined for this stage by Peter Martin, the Economics Correspondent for The Age. Peter was also there for the start of The Walk at Parliament House, but the 9km from Charlotte’s to Kosciuszko gave us far more time for a detailed conversation about why neoclassical economics—the dominant school of thought that, until the GFC occurred, did not believe that such events could occur—was so badly flawed.
The weather was mild at the start of the day, and turned severe as only alpine regions can. As we walked towards the peak, we found ourselves inside a cloud with wind speeds approaching 50 km/hr, and the wind chill factor drove the effective temperature well below zero. The warm weather gear I’d bought for The Walk—running gloves, a gortex jacket and running skins– finally came in handy, as did the cold weather gear that has got me through several winters in Norway and Romania. I reached the peak looking like more arctic explorer than jogger.
Unfortunately that meant my “I was hopelessly wrong” T-shirt was buried beneath several layers of clothing. I began to take them both off for the sake of the photographic proof that I wore the T-shirt all the way, as required by the bet, but once again, the self-organisation of the group saved the day. Dave Lindberg had realised this might happen, and had carried a spare T-shirt just in case. We pulled it over my head with frozen fingers in a gale, and the final photos on the peak were taken.
We then waited for everyone else to arrive—including Nina Shedrin, at 59 the oldest member of the group and the only woman (apart from Ania) to cover the entire distance. All touched the pillar of stones that marksS the country’s highest spot. I finally sat down to enjoy the feeling of having finished a substantial task—and to get out of the bloody wind.
Then we downed the rations that our RAAF contingent and Peter had brought with them, and finally, after too long in the wind, started the 9km journey back to Charlotte’s Pass.
Part of the way there, Peter Martin and his two photographers peeled off to stay in the Kosciuszko Hut and file their story—Peter noted on the way that he was looking forward to filing an economics story with the byline of “Peter Martin, Kosciuszko”). The rest of us walked on, and then waited until all were accounted for before driving back to Jindabyne (Matt Carroll eschewed the car to enjoy freewheeling Australia’s longest downhill run).
That night we had our final very fine dinner at the Journey Wine Bar, after which several members of the party took to late night swimming in the lake, and some woke up the next morning having not sobered up from the night before.
I can’t finish this story any better than did Rob Burgess in his personal post on www.keenwalk.com.au, so I won’t try. In Rob’s words:
Which brings me back to where I began – that this walk was about much more than house prices. The world is in an extraordinary state of flux, as if some reckless performer were spinning too many plates before a dazzled, frightened audience. Most of us see at least one of those plates falling soon (China, Greece, housing, sovereign debt, the stretched biosphere, myriad forms of social disintegration, the stock market – take your pick), but if we are to prevent the rest crashing down around us, and start rebuilding, we’ll need plenty of good-hearted and intelligent people to stand up and act – not just to passively say “the system’s broken”, but to throw all their talents into answering the questions “What’s better?” and ”What’s next?”
On this walk I saw a bunch of people with all the tools required to get to work on this mammoth task. We may not do this together, but the choices we make in our respective walks of life will, I hope, be sustained by the memory of this epic walk – or better still by keeping in touch with and encouraging one another as this difficult phase of history unfolds.
As I dropped Nina off at her south Melbourne flat late on Saturday night, I told her what I’d said to every other member of the party as we said goodbye: “Let’s all meet and climb that mountain again in ten years’ time.”
Nina shook her head. “No,” she said, “That’s too long. Make it five.”
Thanks to all of you for giving me an experience to treasure, and a wealth of ideas and inspiration to take into the future. Keep in touch. And keep walking…
Indeed! As Burgess also observed in his post on the bet itself, “Oh dear. I hope Macquarie’s Rory Robertson hasn’t thrown out his walking boots… There’s no doubt the bet is still on – still for the taking. Yet the thought of Keen winning this bet remains a terrifying prospect.”
Click to donate to Swags for Homeless
Thanks again to everyone who took part, and to everyone who made it a successful fund-raising venture for Swags for Homeless too. And it’s not too late to make a donation… every $60 raised will give one homeless person a portable bed to make homelessness somewhat more bearable.
Staminade
Thanks also to Staminade for donating their sports drink to The Walk. I had already decided to use Staminade rather than any of its competitors because it is the only one to include Magnesium as well as Potassium in its mixture; the fact that is an Australian owned company manufacturing its product here was an added bonus.
“That’s not a knife”: email correspondence about the bet in June 2009
From: Rory Robertson [mailto:Rory.Robertson@macquarie.com]
Sent: Wed 6/3/2009 4:41 PM
To: Steve Keen
Cc: Christopher.Joye@rismark.com.au
Subject: RE: That’s not a knife…
I saw rp data ceo going to sponsor your (eventual) walk…maybe CJoye will put his hand into his deep pockets as well.
All good fun.
Rgds,
rory
—–Original Message—–
From: Steve Keen [mailto:S.Keen@uws.edu.au]
Sent: Wednesday, 3 June 2009 4:22 PM
To: Rory Robertson; Christopher Joye
Subject: RE: That’s not a knife…
Yes whoops, 40% or more (78.6 or below) is you, 20% or less is me (104.8 or above). I wrote too quickly beforehand.
With the prospect that we both might get some alpine exercise agreed, I’m happy with the terms. Chris’s ideas and the RP-Data website etc. could all be carried out as well.
Cheers, Steve
________________________________
From: Rory Robertson [mailto:Rory.Robertson@macquarie.com]
Sent: Wed 3/06/2009 4:12 PM
To: Steve Keen; Christopher Joye
Subject: RE: That’s not a knife…
Steve…please check your calculations…40% drop from 131 peak is 78.6 on abs index…that’s when I would walk.
If that 131 level is regained in any period of time after a fall of less than 20%…doesn’t touch as low as 104.8… then you have committed to walk.
recall that down 20% to down 40% is no-man’s land…
writing “I’m willing to gamble that 131 was the peak” seems bizarre to me…it’s a matter of fact that 131 was the peak…the obvious and only peak that matters..we now are betting on the trough that follows…you say 78.6 or lower, I say higher than 104.8…
talk about what might happen AFTER 131 regained short time or long time is beside the point (perhaps “a trivial peak to peak with a minor trough”)…
having said that…if abs or chris’s index ever falls 40% from its peak level in 2008 – over any number of decades – I will walk…
rdgs,
rory
—–Original Message—–
From: Steve Keen [mailto:S.Keen@uws.edu.au]
Sent: Wednesday, 3 June 2009 3:50 PM
To: Rory Robertson; Christopher Joye
Subject: That’s not a knife…
Dear Chris and Rory,
There is a definitional issue for a trough. The bet was peak to trough, and you need substantial top and bottom inflexion points to identify both–one blip at either end won’t do. But nor do we have to wait until the old peak is restored to identify a trough, which is the way Rory defined it below.
There is therefore a need to define this more precisely, but I’ll start by saying that if the index (ABS 641601, “Price Index of Established Homes ; Weighted Average of 8 Capital Cities ;”) is above 131 by the end of this year then I will walk. But if it falls below 104.8 at any time in the next ten years, Rory walks as well.
If on the other hand it falls to say 100 and then there’s a full year of rising readings, then Rory is off the hook.
I’m willing to gamble that 131 was the peak, but it’s possible that the First Home Vendors Boost could push it up past that level before the end of the year, only to see it fall again a lot more after then. My expectation of a very large fall over 10-15 years would then be vindicated, and if it’s half as big as I nominated (40%), the Rory walks–even if I have already walked beforehand.
In other words, we’ve got a Crocodile Dundee situation here: there could easily be a temporary boom–especially but not solely the FHVB, and if the bet was whether house prices would be above the March 2008 level in the next two years, I wouldn’t have accepted it. But I’m talking a large scale reversal over substantial time period. We could have a trivial peak to peak with a minor trough, followed by a “Now this is a knife” peak to trough afterwards.
Cheers, Steve
________________________________
From: Rory Robertson [mailto:Rory.Robertson@macquarie.com]
Sent: Wed 3/06/2009 11:00 AM
To: Christopher Joye; Steve Keen
Subject: RE: Website
chris and steve…i‘m surprised there’s talk of confusion on basic peak-to-trough detail of bet…after all, the size of any peak-to-trough fall is set in concrete when series in question touches old high…it’s definitional…
peak was last year…whenever price series hits that old high again, whether after 2 years or 20 years, the size of the peak-to-trough fall is settled. only issue then will be whether the fall is big enough (-40%) to make me walk or small enough (less than -20%) to make steve walk.
chris, i’m happy for you to track/promote the bet using your measures…promoting your product by saying abs measure eventually will catch up with reality. but for me it’s neither here nor there which series we use….growth in abs and rpdrm series never will differ by more than 5pp… if steve wants to walk sooner (via rpd-rm measure) rather than later (abs measure) that’s fine with me, but i feel no need to fine-tune details of bet.
rdgs,
rory
________________________________
From: Christopher Joye [mailto:Christopher.Joye@rismark.com.au]
Sent: Wednesday, 3 June 2009 10:15 AM
To: Rory Robertson; S.Keen@uws.edu.au
Subject: Website
Steve/Rory,
Having spoken to you both, this is what I propose to do (understanding that you reserve the right to disagree!):
1) Steve is keen for us to use an independent index that captures all properties and is happy to use the RP Data indices on the basis that I have discussed with him;
2) Rory is happy for RP Data to track the bet using their indices, but, as he noted, is also comfortable relying on the ABS measure;
3) RP Data have agreed to build for free a web-page with graphics etc that is explicitly designed to track the bet using RP Data’s indices;
4) RP Data will donate $1,000 to the bet’s winner assuming that there is agreement on when the bet is won/lost;
5) RP Data will also assist with a fund-raising campaign for the loser to assist them raise money for charity for their hike up Mt K;
6) I will have you each personally approve/sign-off on the website content before it is formally uploaded.
Kind regards,
Chris
Hi Steve,
Not long ago I made a call that the June quarter will be negative for the abs released housing index. I’m sure this has occured to you already but if this happens then the peak in house price will coincide with you reaching mt Kosciuszko. Now wouldn’t that be ironic and what a great story!
I rarely make actual calls on the market. Last time I called the peak in the oil price after it traded above $140 dollars for a while. Also around the same time I liquidated all my shares. At the time credit spreads were rising sharply, liquidity in capital markets was decreasing and at the same time stock markets were hitting all time highs, that call was a no brainer as far as I was concerned.
And now the disclaimer… Please don’t make financial decisions based on this prediction, it is not intended to be financial advice. If you are seeking the help of a financial adviser please see a psychologist first!
Steve
You would perhaps have a little bit more credibility if you would just stop bleating on and on about how you were actually correct, how Rory just misunderstood…how you meant long-term, not this week..how the dog ran across the road which prevented the crash…how it’s everybody else’s fault that property prices didn’t crash, but still will….whatever.
I read an interesting reading on the folly of forecasting and why we are so bad at it. It also listed the defences which forecasters use when their forecasts prove to be incorrect (called ‘ego defence mechanisms’)
They are:
- the ‘if-only’ defence
(e.g “if only the government hadn’t boosted the FHOG then I would have been correct”)
- the ‘ceteris paribus’ defence
(e.g. “I would have been correct about house price crashing if the government or regulators had not taken any action to prevent a crash”)
- the ‘I was almost right’ defence
(e.g “Housing prices almost crashed, didn’t they?”)
- the ‘it just hasn’t happened yet’ defence
(e.g “housing prices are going to fall, one day, just wait and see”)
- the single prediction defence
(e.g “I am correct that housing prices will fall, it’s just that one forecast about the timeframe was incorrect”)
Your excuses/reasons for losing/winning the bet (call it what you will) match up quite nicely with every ego defence mechanism. I had thought it was just theoretical until I started reading your blog.
Ps. if you want to read it yourself, it’s called “Global Equity Strategy: The Folly of Forecasting: Ignore all Economists, Strategists and Analysts” by James Montier, from Global Equity Strategy, Aug 24 2005.
So @2 countryboy, did you have a constructive point to make or are you content to rail and engage in vitriolic hyperbole just to be insulting.
Seriously why did you bother to reply or even read the blog if you dont agree with what is being said. Why dont you just ignore it and go live in your own bubble of smug delusional self superiority.
You haven’t actually posted anything that provides evidence that Steve is wrong you’ve just engaged in an insulting childish rant. Grow up.
also to countryboy:
would you be referring to the same James Montier who now works at GMO?
the last time i checked, the ‘G’ in GMO belonged to one Jeremy Grantham…
In a recent Financial Times interview, Grantham mentioned:
‘the two (bubbles) that are (currently) outstanding are the UK and Australian housing bubbles, which form an interesting and unique subset caused by, I believe, floating rate mortgages. The mortgages came down so fast that they protected the bubble and now we have to see what happens when interest rates rise.
‘But if they do not, in both cases, go back to the old trend line multiple of family income, which is what should drive house prices, it will be the first time in history that such a bubble has not broken. This is not something I would want to bet on if I was thinking of buying a house right now.’
And in his latest quarterly letter, he argues that:
‘The U.K. and Australian housing bubbles may be unimportant to U.S. investors, but to bubble historians they look extraordinary. The U.K. event in particular has broken out of any previous mold. Despite the usual cry of “special case”, they will decline around 40%, back to trend, as was the case for the previous 32 bubbles. If not, it will be the first time in history that a bubble has not behaved in this way. Reversion to trend will involve considerable pain, which I will discuss further next quarter if things are quiet.’
I like the irony that James probably helped with GMOs research here!
Both Jeremy and James are very smart chaps, as is Steve.
The only thing I can suggest to you is keep reading and learning and hopefully Steve’s explanations and reasons for his predictions will make more sense.
to quote from Mr Keynes (of all people!):
“Markets can remain irrational longer than you can remain solvent”
No one knows when the bubble will burst, so it was/is probably not wise of Steve to suggest any specific timing. This is the same for stocks – just because i buy an undervalued company does not mean the gap to intrinsic value will close anytime soon, and similarly, an overvalued company can become even more overvalued before finally falling.
China can keep ticking and we can keep borrowing, the problem is when it stops…
On an unrelated note, Steve, I am curious if you have read ‘The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession’ by Richard Koo, and if so what are your thoughts?
Keep cool please spooky, there are some valid points in what countryboy has said which I’ll address when I get back from a conference this morning. The “bleating” was somewhat gratuitous and I’ll ignore that, but there’s a lot of validity to the criticisms of forecasting in general. Actually it will probably take a post to make a full reply, but I’ll start with a reply when I get back this afternoon.
I am con-fident that the con-fidence trick aiming at improving the moo-d of the herd will be pulled again. It was successful one year ago after the G20 summit. It is yet to be seen whether it succeeds this time – I think that it still may work. It will stop working during the next phase of the crisis in a few years time I think.
It doesn’t have to be centralised as a lot of people simply believe that the globalised casino we are living now is the best and the fairest system invented ever, based on sharing income generated by Wall Street with everyone even people living in the poorest villages in Africa. We can hear the sound of the wealth trickling down. Not to mention how well BHP, Rio Tino and the others look after our environment and what will be left in 50 years.
Our system is just based on globalised debt peonage and unsustainable plundering of not renewable natural resources. There is nothing to defend.
http://en.wikipedia.org/wiki/Debt-peonage
The problem will not be solved by introducing gold standard and disposing of the states thus freeing the masses from the socialist and Kenesian oppresions. The problem may be slighlty reduced if rich speculators are just left alone and not bailed out again. Their assets are our debt. Let them eat their paper gold! We don’t need them and their capital – they are not “allocating resources efficiently”. They need us to pay them interests. States can create money out of thin air. They are doing it right now – and handing it over to the rich so that the global banking system doesn’t collapse and the “Deutsche Demokratik Republik of Europe” dream is kept alive. Again – this is not Keynes. This is not socialism. This is called systemic corruption. States should embrace MMT not just print money and give it away to the banksters and corporations.
The best way to fight the dangerous ideas is to shoot the messenger.
That’s why the frequency of personal attack on Steve and similar people who just want to point out these obvious facts about our global system will only increase.
The hypocricy of our home grown Real Estate lobby is just staggering. The same of course applies to the mining lobby. They both rule Australia. But people have been brainwashed and actually believe in the current system.
http://www.smh.com.au/business/property/property-buyers-hit-with-new-sales-tax-20100512-uy98.html
“TENS of thousands of NSW home buyers a year are set to be hit with a new tax that will cash in on the improving property market and boost state government coffers by an estimated $90 million annually.”
…
“Under the proposal, the portion of the sale amount between $500,000 and $1 million will attract a tax rate of 0.2 per cent, before the charge rises to 0.25 per cent for the portion of the sale above $1 million.
The median Sydney house price is about $600,000, which would attract a charge of $200, while the tax on a property sold for $1.2 million would be $1500.”
…
The acting NSW executive director of the Property Council of Australia, Glen Byers, said that the tax was introduced ”without consultation, without explanation at a time when the investment climate in NSW is fragile”.
So what? What a blasphemy! I would impose at least 1% per annum tax on the value of every property in NSW. I can pay my $3100, no problem – if this goes into building the public transport system… I waste a similar amount of money paying tolls for M7 and M2.
spooky and JustinS, if you read my post you will see that at no stage did make any reference to my views or James or whomever’s on property prices. Instead of sitting at your keyboard hyperventilating because someone dared post a comment which you disagreed with, next time why not actually read what was written.
Granted, as Steve points out, using the word ‘bleating’ was gratuitous and for that I apologise. However my point (which you both clearly missed) remains the same – Steve’s writing (both here and on Business Spectator) exhibits all the classic signs of the ego defence mechanisms.
See? Nothing about whether property prices are too high, too low or just right. It’s not even about property prices.
“Senator Steve Fielding said he hoped the coalition would pick up a Family First policy that allowed people to access their superannuation to buy houses.”
http://au.news.yahoo.com/a/-/latest/7220787/heat-on-abbott-ahead-of-budget-reply/
God save us from politicians.
Folks – countryboy has a point. I believe Steve (and myself, and many other contributors to this blog) will be proven fundamentally correct but were obviously incorrect on timing. Reflation worked and several property markets have returned to all-time highs (Canada, Scandinavia, China..) in response to a variety but hardly unexpected stimulus measures. Australia is not unique in this respect either – sorry to burst that bubble. So let’s enjoy our humble pie, learn the lesson and move on. There’s work to be done.
I’m with country boy (unsurpisingly!). I think there are a few of us disappointed in Steve’s continual comments that he was right..if only…
A good example is that, even in this post Steve says “each 1 percent cut by the Reserve Bank reduces the financial burden on the economy by about 18 billion dollars, which is substantial. But if Australians stabilise their debt levels, or try to reduce them by 100 billion dollars a year, that’s five times the scale of each 1 percentage interest rate cut. We can’t cut more than another 5 percent.”
It makes a mockery of his reasoning that he didn’t expect governments to react in the way they did. Interest rates didn’t get anywhere near 0 and Australia didn’t even enter recession. Steve had looked at and commented regularly on this scenario.
(The only reason I keep hammering away about this is that I would love to see a response from Steve at some stage. I still beleive his theories have a lot of value, I’m still concerned we may enter a depression, but until he can adequately explain how he got it so wrong, I’ll take everything he says with big grain of salt).
Brett123…Steve can answer for himself but:
government action does not make a mockery of his theories or any other contrarian theory – it is hyperbole to say so – the response of governments especially the federal government surprised many.
The reasoning and theories can still be valid (in the philosophical sense) although timing and factorial analysis is not perfect. Nouriel Roubini, and Marc Faber have also called major upheavals about 2 years ahead of time.
Being wrong on exact timing is a difficulty of forecasting, it does not mean arguments, or inferences are wrong. It is wrong however to exaggerate any mistiming of a so-called forecast event because that is faulty reasoning.
BarnabyIsRight,
Yes, if that happened, then property prices would surge even higher, and when the bubble bursts, then Australians would not have any super left, having drained their super and given it to the banks.
Hi Noah,
I didn’t say it makes a mockery of his theory….I actually believe they have a lot of merit.
My main beef is that Steve for some reason expects us to beleive that he did not expect governments to react as they did. I can find a number of examples where Steve wanted interest rates at zero in Australia. If they had gotten to zero we would have had the equivilant of another 40 billion dollars added to the economy.
Interest rates are now at around 4 percent in Australia. Government debt is very minimal compared to other developed nations. The government could do the same thing again. In fact they could do the same thing a number of times. Yet Steve keeps harping on about a house prices crash and a depression just around the corner…. or at least I’ve not heard Steve adjust his timing.
It’s fine for Steve to appear on popular TV shows and scare people with claims of the depression / house crash is just around the corner. Perhaps he needs to clarify what “around the corner” is and how much government stimulus can prevent this from occuring. That’s all I’d like to see.
And just to hammer it home:
——————————————
http://www.news.com.au/business/unemployment-rate-steady-at-54-per-cent-in-april/story-e6frfm1i-1225865974942
“The number of employed Australians hits record of more than 11 million ”
http://www.roymorgan.com/news/polls/2010/4494/
“In the month of April Australia’s total unemployment as measured by Roy Morgan was 760,000 (6.6%), down 76,000 (0.8%) since March”
——————————————
The theory is not the problem here. It is how we understand the theory in the context of the real economy.
The economy as a system is much more complex than the weather system. But theory and forecasting models are much more sophisticated in meteorology than they are in economics, and it is still extremely difficult to make accurate forecasts. Weather forecasts are not what will happen, but what is the most likely thing to happen.
I think many economists fall into the trap of thinking that they know exactly what will happen. The worst thing that can happen to those economists is for their predictions to come exactly true, for that will reinforce the delusion.
Economics compared to meteorology is still at a stage where there is no agreement on how to actually approach the problem let alone develop theory based on any really sophisticated analysis. Forecasting as it currently stands in economics is equivalent to watching the clouds and forecasting rain when you see the first rain drop, or forecasting clear weather when you see the first bit of blue sky after the rain.
We cannot know exactly what will happen. So where does that leave modelling? Well that’s something that needs to be thought about. The Minsky model shows some important dynamics but it is a big mistake to think that this is the only thing happening, not that I think Steve thinks that. But it almost become a bit of a ‘with us or against us’ attitude, as evidenced in the debates about housing shortage. If you are arguing for housing shortage than you are obviously ignoring credit, that sort of thing…
Irrespective of some comments above, I consider that we are all now much better informed of what has gone on behind the scenes.
I will give Ian Rogers – interviewed on ABC TV on the first day – one point, it was a dopey bet. But it was not of Steve’s making.
I reckon Steve made the most of the situation with which he was presented. And the immature squirming and carrying on by his opponent is testament to the fact that his plan backfired – instead of discrediting Steve, it gave him a platform to explain his views (as well as a great personal experience for Steve and all other participants), and with the infantile banter coming from the other side I would suggest the episode has only detracted from Rory’s credibility.
With regards the actual bet, as soon as I read Rob’s interpretation I thought it was still generous to Rory – because at the very end of that first discussion of it, Rory can be heard to mumble “OK, well it’s a long term bet” (it is not included in the transcript above). So his initial response was to admit that Steve’s views were over the long term.
And then this email confirms that Rory later agreed to walk “if abs or chris’s index ever falls 40% from its peak level in 2008 – over any number of decades”
OK, so it’s not be the boost-caused peak, but it’s still very clear his credibility is very much on the line.
But, given his squirming and carrying on, perhaps Rob’s compromise is the best way to go.
And it is now best to let things rest – until, that is, it is time for Rory to walk.
And as I said on the first day of the walk (sadly the only day I joined the group), I hope there are plenty of those baloons left because I will enjoying going to Canberra again to hand one to Rory at each 5km mark on his walk
Lots of balloons are left over H4A, but no T-shirts (though we’re printing another 20 of the Debt 2 GDP ones now to fulfil the orders we received).
And thanks for spotting that mumble by Rory! Would you be able to edit the transcript precisely for me to include that? My hearing is shot by tinnitus, so what was inaudible to me may be easily picked up by you. If you’re willing, I’ll give you author status to enable you to edit the post.
Hi Steve
I extracted the intial discussion of the bet (starting at 36:35) and saved it on my website as a .wma file
http://homes4aussies.com/keenbet.wma
At the very end of that extract – just after your transcript at 36:35 above finishes – through the laughter, Rory’s specific words are:
“so, all right, it’s a long term thing”
I think it would suffice to just add that after those final dots.
Thanks H4A, I’ve amended it; still couldn’t make it out myself with my challenged ears, but I’ll take your word for it.
Just want express my gratitude to Steve and all the others supporting his work. I’m impressed with the positive attitude, flexibility, and willingness to help others.
I work in construction in the U.S. and many of us knew housing here was in for a world of hurt in 2005 but I remember how we felt plum crazy when talking to other people, even our bosses, whom we tried to warn against over-expansion, to no avail. We read http://www.patrick.net just so we wouldn’t feel so weird. Now half of us construction folks are unemployed. It was no fun being right, and it won’t be for Steve either…I’m sure soon you will find being wrong and being on a walk because of it will seem by far the better to when your ideas are redeemed.
Ever since our crash, I have being reading whatever I can find on financial, economic, monetary things…and so appreciate Steve’s insight making great sense of it.
I think the people of the world have been presented with falsely limited choices when facing this global debt bubble. It seems financial parasites want us all to be debt slaves to a few wealthy elites in the form of housing debt or taxpayer paid bailouts to banksters/FIRE industry. I think they are better solutions for our common wealth than 3rd world austerity for whole world. Rigorous thinking like Steve’s will contribute greatly to finding rational solutions that are helpful to all.
Thanks again Mr. Keen. Really, thanks, your ideas are a well of fresh water in a desert of corrupted science.
Many thanks glubilee,
And I have often said that I would like not to be right.
This does raise the issue countryboy alluded to earlier–where I’ve been wrong (in the Australian context at least). It’ something I intend addressing in a post rather than a reply–too much to do right now (as usual) and the topic deserves a longer statement than just a reply.
Your ears must be challenged, Steve
I was bought up on a farm and have a touch of industrial deafness from rarely wearing ear muffs on tractors when I was young – but, rest assured, I’m certain of that dialogue.
Maybe we should commemorate this walk in around 5 years time, then I can complete the journey.
It may be good to remember, as Rory is unlikely to walk even if he loses. That is simply how I read him.
We should feel sorry for him, because he will be alone when that happens, no friends and jobless. Maybe we can walk with him to explain where he went wrong and enlighten him. I’m sure he will not have much to do when house prices are 40% down.
Re tinnitus – have you tried the Neuromonics approach, developed by an Australian physician?
http://au.neuromonics.com/patient/treatment/index.aspx?overview=true&id=42
Brett 123,Countryboy made few good points.
Respectful tone Steve Keen is it time to use your financial models to see what would happen to housing bubble if interest rates are at 1 or 2 percent?
The low interest rates had far stronger result on the cashflow of households than the first homebuyers grant.
Low interest rates can kill any economy.
Mr keen when the bubble bursts will you again advocate for low interest rates, low interest rates only causes a larger debt bubble.
We must clean the financial system out and let interest rates rise to their real rate of atleast 10%.
Mr Keen, I don’t feel sorry for the first home buyers, they recieve plenty of free grant money from the hard working taxpayers.
Nobody force the first homebuyer to buy overvalue property.
No bribe, first homebuyers take responsibility for your financial actions don’t expect bail outs through low interest rates.