Keynes famously used an allegory of a beauty contest to describe how markets behave in the short term. He posed the question of how you should go about betting on the outcome of a beauty contest. To be successful, you should not bet on who you think is the most beautiful contestant but those who you think the judges will consider to be the most beautiful. His point is subtle but distinct.

James Montier at GMO recently highlighted some apparent inconsistencies in the results of the Merrill Lynch Fund Manager Survey. He points out that a significant majority of fund managers now believe the US market to be overvalued,

yet they remain overweight in US equities.

I wrote in December that we believe market valuations may be demanding yet this bull market still may have time to run. Hence we are underweight equities but only modestly so. Montier may argue that we are being greedy for being anything other than maximum underweight equities. We disagree. Investors cannot afford to sit on the market side lines for years because of high valuations. They must have tools at their disposal to help them be more timely. Our tactical asset allocation process is based on the principal that markets are driven accordingly:

Markets can remain expensive for protracted periods, particularly when they are backed by cheap and available money. This has been the case for several years.

Once again we can borrow a metaphor to summarise this, (on this occasion from Ben Graham)

"In the short run, the market is a voting machine,
but in the long run it is a weighing machine"

Liquidity is what keeping this bull market alive and we must monitor the situation closely as we near an infection point in the long term trend.