James Montier: "The Market Is Overvalued By 50%-70%" And "Nothing At All" Is Attractively Valued

Tyler Durden's picture

A month ago we presented a must read interview by Swiss Finanz und Wirtschaft with respected value investor Howard Marks, in which, when explaining the motives driving rational investing he summarized simply, "in the end, the devil always wins." Today, we are happy to bring our readers the following interview with one of our favorite strategists, GMO's James Montier, in which true to form, Montier packs no punches, and says that the market is now overvalued by 50% to 70%, adding that there is "nothing at all" that has an attractive valuation, and that he sees a "hideous opportunity set."

Still, despite the clear bubble in stocks, he is unsure what to do since financial repression could last very long with "the average length of periods of financial repression in history is 22 years. We’ve only had five years so far." Finally on the topic of Japan and Abenomics, "for me, there is too much hope and expectation embedded in Abe, not unlike Obama in 2009: There was so much hope projected into Obama that he could only disappoint." He did, well... everyone but the 0.001% billionaires. Then again in a world in which there is only hope left, what happens when that too is removed?

From Finanz und Wirtschaft

James Montier is a full-blooded value investor. Pickings are slim these days, though, says the member of the asset allocation team at the Boston-based asset manager GMO. He sees a «hideous opportunity set» for investors, with the S&P-500 being overvalued by 50 to 70 percent.

James, are you able to find anything in today’s financial markets that still has an attractive valuation?

Nothing at all. When we look at the world today, what we see is a hideous opportunity set. And that’s a reflection of the central bank policies around the world. They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value. Everything is expensive. As an investor, you have to stick with the best of a bad bunch.

Where are these pockets of relative value?

There are two and a half of them. The half pocket is high quality stocks, companies that have high and stable profitability. But granted: They are nowhere near as compelling as they were even a year ago, so we are slowly selling our high quality positions. We are by the way also reducing our overall equity weight gradually as this year goes on. We have already taken about five points out, and we are at 50 percent now. By the end of the year we’ll probably be at around 39 percent.

And what are the other pockets of value?

European value is still somewhat okay – although there we have increasing concerns about the prospect of deflation in the Eurozone. The breakup risk of the Eurozone has been diminished, the thing seems to be holding together. But that comes with the cost of outright deflation in peripheral countries. That’s a big issue for European equities, not only because deflation increases the discount rate in real terms, but it also increases their debt in real terms. They will owe more in real terms the longer this deflation goes on.

What sectors fall under European value?

A mixture of asset rich sectors: Utilities, oil & gas, some telecom, some industrials. Names we like in that field are Total, BP, Royal Dutch, Telefonica and the like. The problem with all those sectors is that they tend to be debt heavy, which is why the prospect of deflation is such a big issue.

But the European market in general is not cheap anymore?

No. The time to be buying broad European equities was two years ago.

How do you make sure you don’t fall into a value trap with sectors like utilities and telecom?

You can deal with it by demanding a very large margin of safety. I’d argue you don’t get that right now. You could try fundamental analysis, have guys who think they know something about these stocks, and the third is good diversification. You don’t want too much in any one individual name. That’s why we own 150 stocks in our European value portfolio.

What about the mining sector?

They are tricky. We spent a lot of time thinking about mining as well as oil & gas. We’re quite happy with oil & gas. But the mining sector looks expensive to us today. The problem is there is so much supply coming onstream over the coming years, that commodities like iron ore and copper will show significant excess supply even on the assumption of unchanged demand. So we stay away from materials.

What about financials?

We tend to stay away from them, too. You just don’t know what you’re buying. Their balance sheets are built the wrong way around, their assets are liabilities, their liabilities are assets, you just end up scratching your head. So generally, they end up in our too-difficult-to-understand bucket. We own some financials, but only in small size.

And the third pocket of value?

Emerging markets are relatively attractive. But again, despite their underperformance of late, they are not outright cheap.

Every investor seems to hate emerging markets these days, and everyone loves developed markets like the U.S. and Europe. What do you make of that?
This is weird. We see a reverse decoupling theory. For years we heard that emerging markets can decouple from developed markets, and now we hear it the other way round. Neither of these assumptions is true. I don’t think decoupling can happen in either direction. If my assumption is correct that emerging markets are the canary in the coal mine, developed markets will get a hit.

Brazil, China and Russia all trade on single digit P/E right now.

Yes, true. The trouble is that many of these markets basically consist of two things: Financials and resources. Russia is a prime example. And when you look at the credit cycle in many of these markets, they are often quite extended. So they might look cheap, but you have to ask yourself if the earnings they have today will be sustainable. You definitely want to be cautious with financials in emerging markets. We own some assets in markets like Russia or Korea. Gazprom for example, which trades at a P/E of 2, is very cheap. But again, this is not a market to be enthusiastic. Every asset has been affected by the quest for return. I call this the Cinderella curse: Cinderella has already been taken out by Prince Charming, so you are left with the choice between her two ugly stepsisters.

And in order not to be alone, you end up taking out the ugly stepsister?

Yes. That’s what the investing world looks like right now. Not attractive, but there is no good alternative. You have to own some assets. And you just try to get paid as much as possible for taking these risks.

Do you see outright bubbles anywhere?

By some measures, you can say we are in a bubble, for example in U.S. equities. But it doesn’t feel like a mania yet. Today we experience something like a near-rational bubble, based on overconfidence and myopia by investors. It’s a policy-driven, cynical kind of bubble. Not a mania.

You coined the term foie gras rally, where the Fed just shoves liquidity down investor’s throats. How will it all end?

Probably not well. The exit from these policies is going to be extraordinarily difficult to handle. Today’s situation shows parallels with 1994. Then, the Fed had thought that they had done a great job in communicating their policy going forward. But it turned out the markets were not prepared at all, given the fact that it resulted in the Tequila crisis in Mexico. Couple that with expensive markets, and you have a good reason to want to own a reasonable amount of dry powder. You don’t want to be fully invested in this world.

Since the tapering started in December 2013, markets take it rather calmly.

Yes, the ones that suffered were the emerging markets. The S&P-500 just keeps drifting upwards. But I think emerging markets are the canary in the coalmine, the first signal. They had been the beneficiaries of these incredible capital inflows. So the fact that they are the first ones to suffer makes sense. It’s not a huge surprise that stock markets in the U.S. have not reacted, because the bond market has not reacted. The bond market seems to think the tapering will turn out fine. Maybe they’re right. But there is no margin of safety in asset pricing these days. That’s no comfortable position to begin a tightening cycle.

What if there won’t be any exit?

That’s a possibility. The Fed might decide that growth is still too weak and that inflation is not an issue. Then they could keep their policy in place for longer. The history of financial repression shows that it lasts a very long time. The average length of periods of financial repression in history is 22 years. We’ve only had five years so far. That creates a huge dilemma for asset allocators today: How do you build a portfolio with such a binary situation? Either they exit QE, or they don’t. And the assets you want to own in these two scenarios are pretty much inverse. So you either bet on either one of these scenarios, with is kind of uncomfortable for a value-based investor, or you say because we don’t know, the best we can do is build a robust portfolio. A portfolio that is able to survive in all kinds of scenarios.

And what does such a portfolio look like?

If you have continued financial repression, you want a much higher share of equities, because they are the highest performing asset, compared to bonds and cash. If you think financial repression will go on for another 20 years, you need to have equities. For the scenario that the central banks will exit their policies, you will want to own cash, because that’s the only asset that does not get impaired when interest rates rise. So you have two extreme portfolios: One almost fully in equities, the other almost fully in cash. So that’s what we do: We have about 50% in equities, and 50% in dry powder-like assets. That means some cash, some TIPS, and some long/short equity spread trades. But as said, we are reducing the equity part over the course of the year, to build up dry powder.

The pattern in the past years was rather simple: Whenever the S&P 500 corrected by more than 10%, the Fed launched a new program. Could that continue?

You can’t rule it out. That’s part of the Greenspan-Bernanke-Yellen put. Whenever there was a problem, the Fed rescued equity markets. That created a huge moral hazard. Investors have come to believe that the Fed will always make sure that nothing bad happens to equity markets.

Does that explain the buy the dip mentality we see these days? Or is there really so much money left on the sidelines, just waiting to get into equities?

Valuations suggest that most people are fully invested today. I don’t see much evidence of people being overly cautious, but a lot more evidence of people getting exuberant. But bear in mind: Owning a large chunk of cash today hurts your performance. Following a value-based strategy requires you to be patient. We know that patience is a rare treat in human beings, and it is extraordinarily rate among investors. Patience hurts. But it is less foolish to do the right thing for the long term, than try to second guess what will happen in the short term.

What is the fair value of the S&P 500 right now?

Several valuation measures suggest that the S&P is overvalued by 50 to 70%. Every piece of valuation I do says this market is too expensive. The only U.S. equities we currently own are high quality names like Microsoft, Procter & Gamble or Johnson & Johnson.

What’s your view on Japan?

It is far from obvious that prime minister Shinzo Abe will succeed in breaking the mold. He has succeeded in weakening the Yen, but now they increase consumption taxes next month – and thereby run the risk of a re-run of 1998, when Japan killed its own recovery. For me, there is too much hope and expectation embedded in Abe, not unlike Obama in 2009: There was so much hope projected into Obama that he could only disappoint. I’m not sure that Abe will succeed in ending deflation in Japan.

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ebworthen's picture

S&P true valuation = 666!!!

flacon's picture


Soul Glow's picture

The markets are overvalued - no shit.

So is the dollar, so are bonds, almost everything is over valued, especially Kim Kardasion.

CIABS's picture

Why would we want to read an interview that packs no punches?

DirtyWilly's picture

How about Amazon?  With that P/E of theirs they'll still be around after 615 years no?

skwid vacuous's picture

I prefer Cramer - Is he on again tonight... have to set the DVR...

Mister Kitty's picture

James Montier must have went to Harvard.  He's a smart dude.  Bastards.

AbbeBrel's picture

Delicious Squiddly Tidbit!!  The downvoters need a Klo

Bangin7GramRocks's picture

I had a mindless paper shuffling boob explain Amazon to me. He said that the price was fine because lots of people make money trading the stock. Profits didn't matter BECAUSE the stock traded so high. I expect to see worthless turds like him sucking dick for dollars in a few years.

rosiescenario's picture

......probably meant to say 'pulls'....

philipat's picture

Umm, ZH is not renowned for its proof reading or English language ability. But it dpes make up for it with its "Truthiness"??!!

aVileRat's picture

Guy's a generalist looking for free press.

Anyone who is talking his book saying Long microsoft and P&G, but is worried about overvalued retail vehicles trading at irrational growth multiples is full of shit and has a scant sector understanding.

Inflation expectations will die with the end of QE. Fed models say to raise rates, but the second T's price that factor in, retail momentum monkey's are going to be margin hiked back into the sidelines.


AbbeBrel's picture

Downvote cuz Grantham et al (Montier above) are Class Acts  (GMO - M is for somebody else it appears).  As for UR comment, check out Harry Dent and demographics before you spin up inflation yarns.  Looks more likely that 22 years (!! Amazing) of financial repression (i.e. low rates / no interest on your granny's savings) is more likely.  

Cursive's picture


Everything's so phony these days, fair value could be $6.66 (excluding dividends, of course).

PT's picture

Approx 15 years ago I thought that real estate was 30% over-valued.  Then in 2007 I thought it was 450% over-valued.  Then it crashed in 2008 and it was only 350% over-valued.  Then it gradually went back up to 450% over-valued.  But those are just my numbers.  You don't have to believe them.  Your area may be different.  Even if I am right, it hasn't changed anything for almost 15 years.  For all I know, I could easily grow old and die with real estate 1000% over-valued.  Don't forget the old ways of measuring things, but if you want to analyze the current world then you need to use a new set of tools, and I'm not sure if or how maths fits into the new tool kit.

Don't use DC equations to analyse an AC circuit.
Be very careful how you analyse feedback and hysteresis circuits.
If there is no co-relation between your analysis and your results, then you have to find what is missing. 

FreeNewEnergy's picture

Valuation is all relative. Depends on what you're looking for and what works.

Here in the great megalopolis of Rochester, NY, there are so many empty lots, the city offers a FREE garden permit to anybody who promises to grow stuff and keep the lot clean, mowed etc.. So, I found three empty lots in a row (three more right across the street, but I didn't want to be greedy) and the city granted my permit. They are also providing me with flower seedlings, mulch and compost - also free. I have to grow any vegetables in raised beds, so I began rounding up pallets, also free.

With my labor, I will have a 1/2 acre garden within two blocks of about 20,000 working people. So, yeah, a free 1/2 acre sounded good, but I will have to protect the crops too. A couple of motion sensors, some high fences (made from the free pallets) and maybe a few free tomatoes to a couple of the right street people may do the trick.

I'll post some links as the project progresses, but seriously, free land, ya really can't beat that with a stick.

In my more lucid dream-state psychosis I see greenhouses, solar power, maybe a mobile home and eventually the city selling me the land for $50 a lot (total $150) as a public benefit. And, to boot, they can tax me on it (hopefully not too much).

I may not make a lot of money selling my vegetables, but I'll be well-fed, that's for sure, and maybe have a place to live that's (no pun intended) dirt-cheap. Talk about re-puposing!

kareninca's picture

I'm confused.  Didn't you write a number of months ago, that you had bought land down south and were moving there?????

Anway, your Rochester garden sounds fantastic.

PT's picture

I based my valuations on published prices and wages.  Price should have some kind of co-relation with people's ability to pay (I'm a little old-fashioned that way - guess I'm a slow learner).

Nice to know you found your niche. 

Snoopy the Economist's picture

Yeah, I'm sure the deparate people will leave it alone. I remember when I was a kid and we raided gardens almost every summer evening - it was fun and nutritious.



Downgraded's picture

Lol...and WD40 - wait...WD40 is at 77!

Freddie's picture

FaceBook and Tweeter are great companies at cheap valuations. (sarc)

Eeyores Enigma's picture

"Nothing At All" Is Attractively Valued"

 Not even humanity or the biosphere that provides the life support for humanity.

RaiZH's picture

The gold and silver paper markets are attractively "valuing" the physical market, for sure. 

EatYourCornTakeyourPill's picture

I agree that PM's are available at a bargain right now. Not 100% sure if it's because of the paper markets though. It's possible that someone knows something we don't know.

Jack Napier's picture

It is most certainly paper markets. If for nothing else, because they massively expand the available supply (by an order of magnitude of 50-100 according to the late Adrian Douglas of GATA in front of Congress) while simultaneously diverting demand away from the real thing which both create downward price pressure even in a supposedly unbiased market.

Yet we have no such thing since the CME can change margin requirements whenever they are feeling lucky, and the steward of the SLV (JPM) is both the paper runner and the vault watchdog. Heck, the SEC tried to hire Blythe. This IS a very biased downward market, because real money is competition for fiat money; the tool of debt enslavement. Real money cannot be conjured ex nihilo, and would effectively render the Fed powerless, as well as all the entities that benefit from their ponzi.

So it's a double whammy. Metals are not just the obvious choice, they are the only choice. Unless you'd rather listen to Fonestar and implant an RFID chip in your head so you can keep using BTC when the overlords really get out of control.

explosivo's picture

This is the same conclusion I've come to. Don't play a rigged game. Hold onto some real money for now. 

Newfie's picture

You have been around Boris!

McMolotov's picture

Reversion to the mean is gonna be a bitch, bitchez.

prains's picture

come on!, everyone likes their Ponzi a little plumpy in the humpy

Soul Glow's picture

Shorting is the contrarian play and there ain't nothing wrong with being a contrarian when Wall Street is beyond insane.

EatYourCornTakeyourPill's picture

Ask all the people on here who have been shorting the market for the last two years as per ZH blogs advice and let them tell you their results. I would be willing to bet that on average they are all losing investors. Or ask Bill Ackman how his short position went on Herbalife.

Carl Popper's picture

My only successful short was silver and I am not even close to breaking even on my other shorts. 


I have had my ass handed to me more times than I care to remember. 


Fuck shorting.  

Soul Glow's picture

Thus why I pointed out it is the contrarian play.  And until a year ago it wasn't such an over bought market.  As for using other peoples opinions for your own market making, well, I hate to break it to you, but you don't have to take their advice.

eclectic syncretist's picture

A little voice in my head keeps saying "must short Netflix".

WmMcK's picture

First leg, shorted SLV.

Second leg bought Ag.

Still waiting for the 2nd leg to pan out, of course.

Snoopy the Economist's picture

"Fuck shorting"

Carl, I remember listening to Tom Obrien's show when the market came off the bottom. To this day I recall listening to a caller ho stated that he placed a heavy position on shorting S&P at 850 - he wasn't worried because he 'knew' the S&P would drop back below 850 - to Tom's credit he told the caller to use a stop. I also learned the hard way that this market can not be shorted - now I only do longs with quick profits because I don't trust it in either direction.

Downgraded's picture

When you look at big picture, the LOSERS will be all the jackasses in equities "for the long haul".  Of COURSE ppl have made a bundle since S&P @666.  A no-brainer when we had the Stimulus and The Fed is the continual "foie gras feeder".  But if you're not covered, you're going down.  Anything can cause these equities to implode.  You can't take history like you said (last two years) and extrapolate that as though it's going to continue.  Hockey stick bullshit.  Financial companies are hanging by a thread.

NOTaREALmerican's picture

Re:  contrarian play

It's not patriotic tho.     It's cynical, and REAL Mericans are optimistic.  

Blues Traveler's picture

IN the words of Richard Russel, the stock market was not design to make you rich, it was design to distribute equities.  However, stay long the US banks and the list of 36 US companies that are considered national secutiry interest.

IPA's picture

If a stock does not pay dividends i don't see its value. But like gold, companies can't just create more of their stock, or did i get that wrong? 

NOTaREALmerican's picture

Bullshit will see us through.  It always does.   I confidient our brilliant sociopaths will create bullshit for our dumbasses which will increase their confidence AND dick sizes.

* Putin,  a godless commie who hates Merica, and the troops.  

I'm thinking 30 more years of "Keynesian" cold-war toys will turn this country around.

Cue:  slow motion eagles,  flags, and VERY expensive figther jet (protecting our children and creating high paying "Keynesian" jobs.)

McMolotov's picture

Your inspiring words just gave Bill Kristol sticky-pants.

RafterManFMJ's picture

I like it! The new KB-35 fighter jet at an all in cost of 600 million per unit!

KB = Keynesian Boondoggle

Independent's picture

Yeah at least the MIC is smart enough to increase prices relative to the increase in monetary supply.  They are not dumb.  Wait till the dollars flood back in as soon as Russia and China finish off the dollar once and for all.

Motorhead's picture

Sounds like a 'buy' signal!

Element's picture

At least it's not serious.

Gene Parmesan's picture

He "pulls" no punches, not "packs" no punches.