Stocks have known one direction only since the crash in March. And that was up. James Montier, a passionate observer of markets, thinks that the hard landing is bound to come.
The U.S. stock market looks like the hapless Wile E. Coyote, running off the edge of a cliff without realizing the ground beneath his feet had run out some time ago – the description comes courtesy of James Montier (pictured below), stock market strategist at U.S. fund manager GMO. It is pretty clear what he believes is bound to happen: investors will be getting a bloody nose.
Montier – the «Permabear» – argued in his August white paper that the sky-high valuations of equities lack a firm basis given the huge uncertainties.
V-Shape Is a Must
«There is no margin of safety in the pricing of U.S. stocks today,» said Montier. Instead, investors rely on the U.S. Federal Reserve and additional injections of liquidity, prompting their eagerly expected V-shaped economic recovery.
Long-term investors should realize that the future can’t be predicted and instead of pretending that uncertainty doesn’t exist, the value investor would be better advised to build up a margin of safety. He cited French philosopher Voltaire to illustrate this point: «Doubt is not a pleasant condition, but certainty is absurd.» The U.S. stock market appears to be absurd, he concluded.
The Wild Chase for Yield
The stock market has attracted new money because there is no alternative that would offer a proper yield. Even Swiss private banks have given up on bonds and the dollar seems equally unattractive.
Instead, money goes into stocks, real estate, private market investments, cryptocurrencies and precious metals.
A Reformed Bull
It takes a lot of stomach to refrain from joining the flow into equities. Montier is well aware of this trap, having been bullish at the beginning of March, when the first wave of the pandemic broke. He profited a great deal, given that the U.S. S&P 500 gained about a third since then.
Now, he is much more cautious: «A market does not have the divine right to display a sharp bounce-back after a sharp decline.»
