He is surrounded by fools showing garments (7)
I believe the answer is:
clothes
'garments' is the definition.
('clothe' can be a synonym of 'garment')
'he is surrounded by fools' is the wordplay.
'is surrounded by' means one lot of letters goes inside another.
'fools' becomes 'clots' (both can mean stupid people).
'he' going into 'clots' is 'CLOTHES'.
'showing' acts as a link.
(Other definitions for clothes that I've seen before include "Togs" , "Gear" , "Garb" , "Items of apparel" , "Attire" .)