Here’s another great bit of thinking from James Montier in the latest GMO quarterly. He calls this the “the cruelest time to be an asset allocator”.
Here are some highlights:
“However, today we see something very different. As Exhibit 2 shows, today’s opportunity set is characterized by almost everything being expensive. As I noted in “The 13th Labour of Hercules,”this is a direct effect of the
quantitative easing policies being pursued by the Federal Reserve and their ilk around the world.”
“Market participants have (at least until the last month) reacted to this situation by “reaching for yield” as witnessed by the more detailed fixed income forecasts in Exhibit 3. This could be described as a “near rational” bubble (inasmuch as investors are reacting to the very low cash returns, which they expect to last for a long time). I’ve described it as a “foie gras” bubble as investors are being force-fed higher risk assets at low prices. The bad news is that reaching for yield rarely ends well.”
There’s much more in there. In fact, I’d venture so far as to say that Montier has gone “full Post-Keynesian”. You’ll find his commentary on bond vigilantes VERY familiar….Have a read.