Talking cobblers.....

The Dilemma Between Liquidity Fuelled Bubbles & "Boring" Assets - CNBC Interview

I was recently reminded of the incredibly enjoyable interview with CNBC’s ebullient Sri Jegarajah and irrepressible Martin Soong. Fashionistas, rock music fans, 1970s film buffs and market watchers will hopefully still find it entertaining 18 months later.

The Dilemma Between Liquidity Fuelled Bubbles & "Boring" Assets - CNBC Interview

Q&A with Paul Gambles and CNBC’s Sri Jegarajah and Martin Soong

SQUAWK BOX ASIA | 21 April 2021

Sri Jegarajah:-

Right now, the way that you are looking at stocks, I like to think about it as sort of like a shoe analogy. There are stocks that are the equivalent of nine-inch stilettos, and then you’ve got stocks that are the equivalent of sensible hospital type, shoes. Which ones in your mind are likely to do better?

Answer | Paul Gambles:-

I think that is a great analogy and actually we’ve got to the stage where, because we were in such a liquidity-fuelled bubble that actually it wasn't so much nine-inch stilettos but, and we are probably the only people who are old enough to remember the movie Tommy, where if you remember Elton John was carried out, wearing three-foot-tall platform

boots that were too high to stand on and that is more like where the market was last year.

Capital always does what capital does. It flows to the places that make the highest returns and the highest returns last year were some pretty crazy places.

As we know it was Tesla, Ark funds, SPACs and there were cryptos. That is just where the best returns were. That is a fact of how liquidity fuels bubbles. We have been a bit worried that this couldn't last forever and as you know, for a few months, we have been saying, well, it is actually time to put the old sensible shoes on and maybe even Wellington boots or something like that to really get ready for what might be coming up.

And we are still pretty much in that mode. That’s the stuff that we have been buying - the same stocks that have actually been doing pretty well so far this year, particularly the last month and it is a matter of looking out for whether that trend is going to turn or not. But at the moment, it is still, a case of put your granddad shoes on. They are the ones that are going to serve you the best, the way the markets are looking today.

Martin Soong:-  

Here is the thing, Paul, when I hear Wellington boots, I think of mud. I think of mud. I think of extremely rainy weather. Is that what you see ahead?

Answer | Paul Gambles

I think we are heading into a pretty nasty storm if we carry on the way we are going. So, you know, what this is telling us is that the liquidity that is driving these bubbles is basically not coming in at the same rate anymore.

Remember, liquidity-fuelled, bubbles need continued inflows and we're not getting that anymore. We're not seeing that. So, this is a big warning sign that actually, we have gone from the phase when the crazy stuff worked to the phase where the sensible stuff works but the next phase could be that you really need to be completely locked down in the really safe stuff, because otherwise you're going to be up to your neck in mud.

So, unless we see a sign that there is more liquidity being produced, and it takes huge amounts these days to move the markets, unless you see a sign that there is more liquidity coming, then get ready to batten down the hatches, put your wellies on, put your scarf on and get ready for a big storm.

Sri:-

You're more like wingtips and Oxford Brogues, right Paul? But you and I are kindred spirits. Tommy, Pinball Wizard, Roger Daltrey, Elton John, deaf dumb and blind kid…brilliant stuff. But if you are tottering around on these platform shoes or nine-inch stilettos, depending on what your choice is, then you have got to come a cropper sooner or later. And that is exactly what the tech stocks and the NASDAQ and the frothier end of the market is looking

like isn't it, especially if earnings from the market, which are coming at the end of the month, do not stack up, do not match those lofty valuations. Are they going to come a cropper here?

Answer | Paul Gambles:-

They’re priced for perfection. They’re priced for absolute perfection because that is where they've been driven by the liquidity that we have seen over the last year or so, which they disproportionately benefited from. So, they come a cropper at the point when either the market gets starved of new inflows of liquidity or when the market realizes that perfection was the wrong price calibration to use and that they have been using the wrong valuation metrics because we're not in a perfect world after all.

So, I think it could be valuations or it could just be lack of liquidity by itself. Or it could be a deteriorating macro picture because at the moment we're still in the reasonably ebullient macro picture but it's hard to see how that sustains into the second half of the year. So, you know, all of these headwinds could well be blowing at once.

Martin:-

Yeah. The other issue, if you're not wearing sensible shoes, are banana skins on the pavement, in the form of the 10-year yield. Right now, we seem to be in the clear trading between one and a half to one and three quarters. We can live with that, but what’s the risk that we're being lulled into a false sense of security here, Paul?

Answer | Paul Gambles:-

It is possible but not our base case. Our base case is that because we think that there’ll be macro headwinds in the second half, we actually see rates falling, not rising, which is why we still see treasuries as the best defensive hedge.

But our secondary case was that if we've got that wrong, about the macro, then actually that's still a worry for frothy stocks because if the macro is strong, then interest rates are under upward pressure not downward pressure which therefore, in itself, undermines the rally.

So, either the rally is going to be shown to have been built on shaky foundations or it is going to be a rally that ends up eating itself because the interest rate environment becomes too much of a headwind. Either way, it doesn't look like a good time to be putting those stilettos on.

Sri:

Paul, a little bit of fashion advice as well as actionable, market advice for our audience. Thank you very much, indeed for that, sir. Paul Gambles of MBMG Group.

Paul Gambles Managing Partner , MBMG Group

Paul’s range of expertise includes asset allocation, tax structuring and macro-economic analysis. He graduated Cum Laude from the University of Warwick, B.A. in English and European Literature, and became a Full Technical Inspector at the UK Inland Revenue. He then moved to the Bank of Scotland Group and spent nine years in corporate and asset finance. In 1994 he helped set up MBMG Group. Paul has completed CFA Level 1 and he is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner. He is well known as an expert commentator appearing regularly on CNBC, Bloomberg TV and Channel News Asia. Paul is a regular contributor to industry and chamber of commerce magazines.

MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.

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About the Author:

Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.

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