GMO Strategist Montier Warns Markets Are In A 'cynical Bubble' That 'greedy' Investors Don't Want To Miss Out On

In a note entitled The Advent of the Cynical Bubble, Montier said this scenario is based on the belief that everyone thinks they will be able to get out before anyone else.

He highlighted recent surveys from the Bank of America Merrill Lynch which showed the highest level of fund managers citing "excessive valuations" ever but they were found to still be overweight equities.

"This gives rise to 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 [Baupost Group CEO and president] Seth Klarman pointed out long ago, this isn't really fear at all, but rather greed."

Furthermore, Montier also challenged the common belief that a sense of euphoria is required for there to be an asset bubble, which was not always the case.

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"I would suggest that [the cynical bubble] is exactly the sort of market we are observing at the current juncture," he said.

"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 have had recently where investors have said they simply 'have to own US equities'.

"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 do not end well - inevitably some are crushed in the stampede."

Montier compared his theory to GMO co-founder Jeremy Grantham's "market melt-up", a FOMO-driven rally before a crash, and said the scenario is something he could not rule out.

The Shiller P/E ratio for the S&P 500, he highlighted, is currently at 32 - the second highest level in history behind the tech bubble in the early 2000s, when it was nearer 45.

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"It is possible that the cognitive dissonance of the fully-invested bear might not be as puzzling if the US equity market was the only expensive market," he continued.

"But, sadly, saying something is cheaper than the US is not the same thing as it being cheap in absolute terms.

"So while we agree that if you must own equities you should own non-US equities, it is hard to argue that they are not expensive in their own right - which makes it hard for us to want to be overweight equities as an asset class."