In the latest GMO Insights, James Montier discusses “cynical bubbles” and the concept of the “fully invested bear”.

Here are some snips from James Montier’s excellent article on the Advent of a Cynical Bubble.

For ease in reading and to display the charts as large as possible, I dispense with blockquotes. I will mark the end of Montier’s excellent article with a comment.

That the US equity market is obscenely overvalued can hardly be news to anyone. Even a cursory glance at Exhibit 1 reveals that we are now at the second most expensive level of the Shiller P/E ever seen – surpassed only by the TMT bubble of the late 1990s!

Only a handful of what we might call valuation deniers remain. They are dedicated to finding new and inventive ways to make equities look reasonable, and they have never yet met a bull market that they didn’t love.

As we have documented before, the Shiller P/E isn’t perfect, but it does a pretty good job of providing a really simple way of checking valuation. Nor is it unique in showing the US equity market to be extremely expensive. So for all the hand-wringing over the inclusion of 2009 in the 10-year average, the lack of robustness, shifting payout policy, etc., that haunts discussions based on the Shiller P/E, it is still a very powerful metric.

This is not news to most institutional investors. A recent Bank of America ML survey showed the highest level of those citing “excessive valuation” ever (see Exhibit 2). [Mish Note: lead-in Image]

Yet despite this, the same survey showed fund managers to still be overweight in 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 Seth Klarman pointed out long ago, this isn’t really fear at all, but rather greed.