Juggling Dynamite

James Montier is a member of the asset allocation team at GMO UK Ltd. Previously, he was co-head of global strategy at Société Générale S.A. and a global equity strategist at Dresdner Kleinwort. Mr. Montier is the author of several books, including Behavioural Investing, Value Investing, and Behavioural Finance. He is a visiting fellow at Durham University and a fellow of the Royal Society of Arts. Mr. Montier holds a BA in economics from the University of Portsmouth and an MSc in economics from the University of Warwick.

He gave a useful presentation at the CFA Institute’s Annual Conference this week where he systematically reveals the dangerous nonsense underpinning modern portfolio theory so widely followed in finance today.

Here is a direct link to the clip. You will need to advance the play bar to 18:40 to where Montier is introduced.

There are many gems in his talk–such a refreshing relief to hear someone call bullshit rubbish on conventional wisdom in this area.  (I gave a similar talk at the CFA Institute Conference in Atlanta in 2008.  It was well received, and completely unheeded by the industry, of course.)  Existing business models in the money industry are so flawed, endemic and misguided that it is very slow to evolve changes needed.  And so the firms, advisors and clients will apparently keep learning hard lessons the hard way for a few more years to come.

Yesterday I did my bi-weekly spot with Kerry Lutz out of Greenwich. You can listen to the audio here.

Lakshman Acuthan, Economic Cycle Research Institute, says a recession could begin by the middle of 2012. “It takes six months after a recession begins for people even to recognize [it],” he tells “Squawk Box.”  Here is a direct link.

This clip is a wonderful study (albeit embarrassing to watch) of how infantile the mainstream CNBC-esque understanding is of market cycles. Joe Kernan and company are representative of almost all business commentator/hosts today. They understand next to nothing and yet they are looked to as “experts” in this field. They rail against the idea that we are entering the next recession because they think of recessions as unfortunate anomalies–like a 100-year flood. In fact recessions are a normal part of a full business cycle and during secular bear periods, recessions come on average every 3 years. We are now due for the next one.

The truth is that the seeds of the incoming cyclical recession were sown in the reckless excess of the stock boom period of the 90’s, and the credit orgy to 2006 (to 2011 in Canada). The economy is not about to blow up. It already did. We are now just moving through the rationalization, deflation and clean up phase. Central banks may continue to intervene, but the weight of the downturn has a gravity born of the dizzying heights of the bubbles before it. No governments or central banks can stop the process of mean reversion. And that is a good thing. The next organic secular boom period can only start after asset prices have been fully wrung out and capital can be efficiently redeployed in productive business ventures rather than extractive financial shell games. Wise investors will get out of harm’s way and let this process unfold in its due course.