James Montier Blasts All Pundits Who Say To Buy Stocks When Bonds Are "Unattractive"
James Montier, formerly at SocGen, and now at GMO, has released his latest white paper which shares his seven "immutable" laws of investing which are as follows: 1. Always insist on a margin of safety; 2. This time is never different; 3. Be patient and wait for the fat pitch; 4. Be contrarian; 5. Risk is the permanent loss of capital, never a number; 6. Be leery of leverage; 7. Never invest in something you don’t understand. Of course, these are nothing new to anyone who trades on anything besides simple momentum (a strategy which always inevitably leads in massive capital loss). Yet the one observation we are delighted to read in Montier's letter is his relentless bashing of all pundits who claims that when bonds are unattractive one should buy stocks (that would be everyone on CNBC among others). His explanation "One of the “arguments” for owning equities that we regularly encounter is the idea that one should hold equities because bonds are so unattractive. I’ve described this as the ugly stepsisters’ problem because it is akin to being presented with two ugly stepsisters and being forced to date one of them. Not a choice many would relish. Personally, I’d rather wait for Cinderella to come along. Of course, the argument to buy stocks because bonds are appalling is really just a version of the so-called Fed Model. This approach is fl awed at just about every turn. It fails at the level of theoretical soundness as it compares real assets with nominal assets. It fails empirically as it simply doesn’t work when attempting to predict long-run returns (never an appealing trait in a model). Moreover, proponents of the Fed Model often fail to remember that a relative valuation approach is a spread position. That is to say that if the Model says equities are cheap relative to bonds, it doesn’t imply that one should buy equities outright, but rather that one should short bonds and go long equities. So the Model could well be saying that bonds are expensive rather than that equities are cheap! The Fed Model doesn’t work and should remain on the ash heap." Alas, with "career risk" the one and only factor that matters, nobody will likely read let alone take these rules seriously until it is once again too late.
The famous chart posted many times previously on Zero Hedge showing the very abnormal market during the time of the Great Moderation.
Full must read letter: