In This Article:
- By Bram de Haas
James Montier of GMO put out another bearish notes. These are must reads, especially if you are bullish or positioned bullish. I noticed my last article on a GMO note which talked about the possibility of a 50% melt-up was much more popular compared to the bearish commentary I share. We all want the market to go up and keep riding the easy money waves. That's why it is so important to seek out that other sound. The grumbling of the bear. You can read the full note here, but I've quoted some of Montier's gems below accompanied by my perspective:
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The intrinsic value of SPY
Montier leads of by showing the elevated multiples awarded to the S&P 500. Most of you will be aware of the high valuations we are observing. The only reasonable defense I heard is that posited by Buffett; stocks are about fairly valued at these interest rates. The problem is I don't believe interest rates are on a random walk from their current level. Once the Fed reverses directions and starts raising rates it continues on that path. Usually, getting interest rates to much higher levels compared to the current. The one reason I can see the Fed deviate from that path is if we are hit with a surprise recession (there are no signs of one). However, if a recession hits, the market will be in trouble as well. The way I look at it, there isn't really a path the Fed can take that tends to bolster equities or bonds for that matter.
Montier proceeds to show a couple of very interesting graphs about professional fund managers outlook and positioning:
The pair of graphs show that most professionals believe the market is overvalued. Logically, they are massive long equities and sarcasm.
Montier than seeks the explanation for the discrepancy by assigning a type to the kind of (bubble) market we are experiencing; the rational bubble.
"The third type of bubble is known in the academic literature as a near rational bubble. I am not a great fan of this nomenclature as it suggests a veneer of respectability that I find undeserved. To me these are really better described as greater fool markets. They are cynical bubbles in that those buying the asset in question don't really believe they are buying at fair price (or intrinsic value), but rather are buying because they want to sell to someone else at an even higher price before the bubble bursts.
Chuck Prince, the former CEO of Citibank, aptly demonstrated the typical cynical bubble mentality when in July of 2007 he uttered those fateful words,