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"Equity markets are overvalued" - James Montier


Guest hellsten
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Great interview with James Montier where he shares his view on Russia, Japan, US, and more:

http://www.fuw.ch/article/equity-markets-are-overvalued/

 

He sees a «hideous opportunity set» for investors, with the S&P-500 being overvalued by 50 to 70 percent.

 

This was interesting:

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.

 

 

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After spending the last six years promoting the benefits of the "wealth effect" it is hard to believe that the FED would sit idly watching the market collapse 50%..... I am not saying markets are not over-valued but isn't the FED trapped? At this point central bankers around the world can not afford to allow the markets to collapse.

 

cheers

Zorro

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"After spending the last six years promoting the benefits of the "wealth effect" it is hard to believe that the FED would sit idly watching the market collapse 50%..... I am not saying markets are not over-valued but isn't the FED trapped? At this point central bankers around the world can not afford to allow the markets to collapse."

 

The true and most important mission of the Fed is to act as a lender of last resort for banks. In the case of the most recent credit crisis they did this by buying an enormous quantity of questionable assets held by banks in order to keep the banking sector from collapsing. Now that banks are lending again the FED can and should allow markets to collapse.

 

They can't and should never allow banks to collapse.

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As far as I know, he does not manage money directly. He is based in London and advises Boston based GMO on their (global) asset allocation. GMO manages a lot of money (like 100 billion or so).

 

He writes insightful letters (also a few good books), always with a bearish touch.

 

GMO has been right at the major turning points, oftentimes early. Their 7-10 year forecasted stock returns are probably as accurate as anyone's.

 

Just my 2 cents.

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' "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.'

 

I'm sure its hard to find bargains if you're managing 100 billion. 100 billion dollars is just too much to manage in an equity portfolio. For individual investors, if you think there is nothing cheap, much less fair value, then you aren't looking very effectively.

 

"Several valuation measures suggest that the S&P is overvalued by 50 to 70%"

 

I think that is a funny statement. Which valuation measures suggest this? Does anyone really think the S&P could drop 70%, especially without a dramatic drop in earnings? There would be dirt cheap stocks after a drop like that. I tend to think he just wants the market to drop, because that would make his job easier. It is incredibly difficult to effectively manage that much money with a lot of the market at fair valuations, so he will probably have people pulling out capital from his management. Tough for him, good for people with smaller asset management operations that can find value in smaller stocks.

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I think that is a funny statement. Which valuation measures suggest this? Does anyone really think the S&P could drop 70%, especially without a dramatic drop in earnings? There would be dirt cheap stocks after a drop like that. I tend to think he just wants the market to drop, because that would make his job easier. It is incredibly difficult to effectively manage that much money with a lot of the market at fair valuations, so he will probably have people pulling out capital from his management. Tough for him, good for people with smaller asset management operations that can find value in smaller stocks.

 

It depends on how you interpret it. If the markets are overvalued by 50% that would mean a possible 33% drop, 70% would mean a 42% drop...

 

BeerBaron

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"Does anyone really think the S&P could drop 70%"

 

If the money supply doubles, the S&P500 will have effectively crashed by 50%. After the initial margin calls, it should zoom up like crazy. It's the same argument that the US can never default in nominal terms on its debt cause it can always print money to pay the bonds. But it can very much default in real terms. So in the end, it is the shaking out due to volatility of over-leveraged players that becomes the primary danger

 

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Montier has been bearish for quite a while now. In my opinion he doesn't like the current economic situation and the Fed policy and then concludes stocks are overpriced.

 

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.'

 

I don't follow his reasoning. Most stocks are still solid, fundamentals are improving and big stocks like AAPL, BAC or XOM are not overpriced based on their fundamentals.

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