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Brett Arends' ROI
March 14, 2011, 1:00 a.m. EDT
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Lessons from Japan's other quake
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” The good news: We're still not in a bubble as big as the ones in 1999 or 2007.
The bad news: We're getting close.
"I am deeply, deeply worried," says James Montier, the highly regarded strategist at fund firm GMO and a rare contrarian. "This is the first officially government-sponsored market mania for a very long time."
Joe Bel Bruno explains why stocks rallied in the final hour of trading Friday.
Assets aren't as overvalued as they were in 2007, he says, but they're in the ballpark. "We're not completely priced for perfection, but we're not far off. There's no margin of safety left. [Former Fed chairman] William Martin once said that the job of the Federal Reserve was to take away the punch bowl just as the party gets going. But this time around, the Federal Reserve is spiking the punch bowl and handing out glasses. The hangover is going to be bad."
Montier and I were having lunch in a seafood restaurant on Boston's waterfront on a cold, wet, dismal day. Through the windows, a thick mist shrouded the harbor and the boats. Montier, who's British, was over briefly from London and joked that the weather is more like back home. It was also gloomy enough for his message to investors.
I first came across Montier when I worked in London. He was at the investment bank Dresdner, and then with SG Securities. His published reports developed a cult following among value investors and contrarians in London's financial world. As tumbling markets bore out his warnings, Montier's star rose. Then Jeremy Grantham, a fellow Brit and the chairman of Boston's GMO, took him in-house at GMO and now he publishes more rarely. We met up after his latest commentary, "The Seven Immutable Laws of Investing." (More on them in a moment.)
Montier thinks investors are getting suckered by the Fed. They don't understand how Ben Bernanke's program of ultralow interest rates and his latest $600 billion program of bond purchases "” so-called QE II, or a second round of quantitative easing "” is driving the market. "QE II works by driving the future returns of all assets to zero," he explains. "That's Ben Bernanke's grand plan. It's the only way you can force people to spend."
With interest rates on the floor, he adds, "the Fed is forcing people to take on risks. And in this market, I just don't think you're getting paid for it."
Montier admits that there's a risk in trying to swim against a Fed-induced boom. "The old adage, "?Don't fight the Fed,' is one that you have to bear in mind," he says. "But what I don't want to do is compromise my standards of value. One of the most important things that investors don't always have is an absolute standard of value. If the market gets too expensive, you should get out."
"?One of the most important things that investors don't always have is an absolute standard of value. If the market gets too expensive, you should get out.'
The latest forecasts from GMO make for sobering reading. From current stock-market levels, GMO thinks you're going to lose money, after inflation, on small-cap stocks and barely break even on large caps over the next seven years or so. The picture for bonds is similar.
Montier, in a fascinating aside in his latest research, estimates that if 10-year Treasury bonds were "fair value," they'd have a yield of about 4.5% to 5% "” far higher than today's paltry 3.4%. That suggests bonds are heavily overvalued.
As for stocks? Montier recently screened equity markets to see how many would meet the tough "margin of safety" standards laid down by Ben Graham, the father of value investing. His findings: In Europe, he could only find about 10 stocks that passed. Here in the United States, across the entire S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,304, +9.17, +0.71%) , he couldn't find a single one.
"This is the conundrum for asset allocators," Montier says. "What do you do when cash pays you zero, but you're not being paid very much for taking on risk?"
His answer breaks the rules you hear from every broker everywhere.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co.
While governments and disaster agencies will have much to learn from Friday's tragic disaster in Japan, there are also lessons to take from the largely unnoticed Japanese earthquake just a couple days earlier.
1:31 a.m. Today1:31 a.m. March 14, 2011
"Contrarian's trouble with new bubble http://on.mktw.net/fuzvgc" 1:07 a.m. EDT, March 14, 2011 from MKTWArends
"How the iPad 2 could cost you more than the Xoom http://on.mktw.net/fyvgU5" 12:25 a.m. EST, March 8, 2011 from MKTWArends
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