James Montier: This Is A "Greater Fool Bubble" And I'm Getting Out

Last August, we were delighted to point out the latest quirk of this incredibly manipulated and centrally-planned "market": in "Record Number Of Fund Managers Say "Stocks Are Overvalued" As They Rush To Buy Nasdaq", we noted a paradox whereby on one hand a record number, or 46%, of Wall Street fund manager respondents to the BofA monthly survey said stocks are "overvalued"...

... even as virtually all remained fully invested in equities.

Today, half a year later, the same paradoxical observation forms the basis for the latest note by Jeremy Grantham's colleague, GMO's James Montier, titled "The advent of a cynical bubble", in which he uses the exact same survey and makes the exact same observations to reach our conclusion:

A recent Bank of America ML survey showed the highest level of those citing “excessive valuation” ever. Yet despite this, the same survey showed fund managers to still be overweight in equities.

To Montier this combination was not paradoxical per se,as much as exposing a the existence of that strangest of creatures: "the fully-invested bear."

The most common rationale for such a cognitively dissonant stance is “the fear of missing out on the upside”(aka FOMO – fear of missing out). As I think Seth Klarman pointed out long ago, this isn’t really fear at all, but rather greed.

How does one explain the existence of this particular "greedy bear"? To Montier the cognitive dissonance noted above is a function of the Fed-reflated bubble the US finds itself in: the near rational - or cynical - bubble, also known as the greater fool bubble. Here's Montier:

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, “As long as the music is playing, you’ve got to get up and dance. We are still dancing.”

If the presence of the proposed buyer of last resort rings a bell, it's because that's precisely the market environment the Fed has created: there is no longer any risk not because fundamentals are strong or the economy is improving, but because the Fed will always step in and rescue the market when things turn south. Montier agrees:

I would suggest that this is exactly the sort of market we are observing at the current juncture. Fund managers for the most part all agree that the US market is expensive but still they choose to own equities – a cynical career-risk-driven position if ever there was one. I have been amazed by the number of meetings I’ve had recently where investors have said they simply “have to own US equities."

While such a bubble can make speculators extremely wealthy if only for a period of time - because putting money into what everyone knows is a ridiculous valuation is not investing, it's speculation, and as Montier admits "that the US equity market is obscenely overvalued can hardly be news to anyone" - it only works as long as there is at least one more greater fool to sell to.

Indeed, Montier concedes that "cynical bubbles are based on a belief that one can get out before everyone else. Obviously, this is simply impossible. Like a game of musical chairs played at a child’s birthday party, when the chairs are increasingly rare, the competition for them gets fiercer. Crowded exits don’t end well – inevitably some are crushed in the stampede."

Which brings us to Montier's conclusion, one shared with the movie war games in which the only winning move is "not to play" any longer. As the GMO strategist, who admits he can't time bubbles, admits, "perhaps you are skilled at picking the managers with great timing ability, and perhaps those managers do have great timing ability, in which case, good luck."

As for me, I prefer to leave the party early, in the knowledge that I can walk away with ease.

Monitor's conclusion: an aptly appropriate excerpt from JM Keynes himself:

It is the nature of organized investment markets, under the influence of purchasers largely ignorant of what they are buying and speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of future yield of capital - assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.

We saw an example of this "sudden and catastrophic force" last week. We will see it again soon, once the "greater fools" realize there are no more left and the cynical bubble finally bursts.

Source: GMO


fx Slomotrainwreck Wed, 02/14/2018 - 10:13 Permalink

So more than half of these pros still believe in fairly priced or undervalued US equities? Stunning!

Dow 40k, before this house of cards collapses. The current correction is just a minor blip and the 10year ain't going much beyond 3 %, if it ever reaches that level. This madness will go on for quite a while longer and the 10year yield will bottom near or below zero, before all is said and done. Rumours about the death of the bond bull market are greatly exaggerated.

In reply to by Slomotrainwreck

rex-lacrymarum Captain Nemo d… Wed, 02/14/2018 - 12:21 Permalink

Dream on. The number of people who actually manage to get out of a bubble with a real profit because they got the exit timing right is not only extremely small, it is also exactly equal to the number of greater fools they sold to at the top - this has to be so by definition. The chances of anyone meeting them after they "bought their Ferrari" is even smaller (most of the really smart guys aren't into bragging about their profits via ostentatious wealth/status symbols anyway). 

The investor class as a whole cannot possibly escape the coming losses, as someone has to hold all existing stocks at all times. Lastly, the same people who are now so convinced that the only direction for the stock market is up were darkly bearish at the lows in 2009. A little bit of googling and a look at various data points easily confirms this. 

Of course, every inflationary asset bubble does leave a few winners in its wake, such as e.g. the CEOs who cashed out their stock options while destroying the balance sheets of their companies by loading them up with debt for stock buybacks, the investment banks charging exorbitant fees for M&A advice, the hedge fund managers getting their 2/20 cut for as long as the bubble lasts, the government in the form of capital gains taxes. The one group that is least likely to benefit when all is said and done are investors.  So, sorry - no Ferrari for you or any of the other true believers. The customers' yachts will remain a figment of the imagination. 

In reply to by Captain Nemo d…

CRM114 Tue, 02/13/2018 - 15:41 Permalink

Some simple questions:

What do you want the money for?

How will you know when you have enough?

Are there other ways to reach your goals?

What life could you have if you stayed out of the market?

What life will you have if you get it in the shorts and the market collapses?

How often do you review all the above?



AlphaSeraph Tue, 02/13/2018 - 15:42 Permalink

It's not a greedy bear scenario. It's a central bank put belief fueling a "fuck it they will just print" attitude.

The questions that remain are: is the current unwind by the Fed a legitimate effort to reduce it's balance sheet permanently? Or a head fake to cheapen equities one last time for the big boys to get in and ride the DOW to 35k after a tantrum down to 20k or so? OR are they really this naive thinking they can unwind years worth of QE without tanking both sovereign debt and equity markets at the same time which will then turn them into slobbering weak kneed little twats who cave and return to full print mode?

LawsofPhysics Tue, 02/13/2018 - 15:51 Permalink

Blah, blah, blah...

Power corrupts and absolute power corrupts absolutely...

It is was it is, until it ain't, in the meantime...

"Full Faith and Credit"

same as it ever was!

Southern_Boy Tue, 02/13/2018 - 15:58 Permalink

The "Getting Out" part is easy....it's the "What and Where do you GET INTO" that's the hard part. 

On the other hand....if all the sheep are on the overvalued side of the train......why jump the train? 


An Shrubbery Southern_Boy Tue, 02/13/2018 - 22:31 Permalink

"The "Getting Out" part is easy....it's the "What and Where do you GET INTO" that's the hard part. "

That's what I'm worried about. If this MOAC (Mother Of All Crashes) is half as bad as all the self-proclaimed experts say it's going to be, where do I park my stash?

At least blue-chip stocks will retain SOME value. More so than most of the other options I see thrown around. They are the fuckers who control their lapdogs in congress. They have their hands on the levers of power. If anything is worth anything after MOAC, my money is on Gubbamint Sachs.

In reply to by Southern_Boy

Alexander De Large Tue, 02/13/2018 - 16:05 Permalink

James Montier: "Man, Do I Hate America And Wish A Brave Patriot Would Kick My Doubting Thomas Ass The Fuck Out"

How does one explain the existence of this particular "greedy bear"?  Easy: Americans are in the midst of the biggest bull market since slavery.  It is not rocket science.  But you cannot explain this to James, who was known as "Gay James" in high school to differentiate him from the other James Montier, who was not a pussy.

Here is an excerpt from his monthly financial newsletter, "Investing For Pussies Who Hate America": "Look guys, you know I hate this country and now that I have fleeced my investors I am getting out of the stawk market.  Sister, let me tell you, equities are a doozy!  I sound even more like a castrated Rip Taylor than back when I was able to convince people to give me their money.  Now I can't and I am even more smooth and nutless than ever before."

Unprepared Tue, 02/13/2018 - 16:28 Permalink

Wasn't this similar to the Greenspan put, until it suddenly it wasn't and everyone was angry because  that put was worth as much as AIG-issued CDS? Is this done intentionally to time the market?

ptrsn Tue, 02/13/2018 - 17:59 Permalink

Grantham used to tout how he managed in great Aunt's account back in 2007/08. Cautious...protect for a rainy day...go to sideline etc. I read him closely and owned his Asset Allocation fund which was his bellweather fund to protect and go to cash when fearful and make a bit in good times.  He called the fear in July '08 and said he wanted to "protect Aunty" and get out. But he didn't. Clients had a draw down similar to others. You see his fund couldn't go to cash as he alluded per prospectus (you know the ones you toss b4 opening). Fund has consistently lagged ever since. Often referring to their 7 yr allocation forecast every month. Now he's all on the hot air climate train. They used to tout how they manged money for John Kerry and Dick Cheney...when they were somebody.

Let it Go Tue, 02/13/2018 - 18:23 Permalink

When you invest there is always a risk. Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market take nasty and violent swings they learned a few things, this time, they figure they will make the right moves before it is too late. But what if it hits like the flash crash on steroids?

Imagine a scenario where the market falls like a flash crash on steroids and investors are trapped. They have been assured that can't happen because circuit breakers have been put in place to arrest panic style moves but if trade is halted, and the market simply does not reopen for days or even weeks suddenly it is a new game. As remote as this might seem the article below explores this possibility and the far-reaching ramifications.

 http://Flash Crash On Steroids Is Possible .html

Youri Carma Tue, 02/13/2018 - 22:58 Permalink

We have the FED put and stock buybacks so you would be a fool not to ride this bubble because it's so easy. But many will be caught off guard when this bubble pops because of greed. Question remains how do you undo 10 years of QE? I think, not!

BetterRalph Wed, 02/14/2018 - 05:37 Permalink

California patriots need to re-do it's leaders (mexican mafia) Bacerra, (mafia meth) Pelosi, (sleeping) Matsui, (dual citizen) fEINSTOOGen because as it stands, You can sneak in any time you like, ignore check out anytime you like, commit crimes and then never leave.   I know that doesn't fit the song, but the song doesn't encourage illegal aliens either. 

They tromped the second amendment to hell with the 10 round clips and bullet buttons.

End this madness. Recall, and vote these pieces of dishonorable garbage out.