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.