Talking Points

Dilemma Between Liquidity Fueled Bubbles & "Boring" Assets

Dilemma Between Liquidity Fueled Bubbles & "Boring" Assets - CNBC Interview

Paul Gambles on SQUAWK BOX ASIA 21 April 2021

Question 1: 

Right now, you are  looking at stocks. I guess the way I like to think about is sort of like a, a shoe analogy here, right? There are stocks that are the equivalent of nine-inch stilettos, and then you’ve got stocks of the equivalent of a 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. We are probably the only people who are old enough to remember the movie Tommy, but 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, the highest returns and the highest returns last year were some pretty crazy places.

As we know it was Tesla, Ark funds, there were SPACs, 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 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.

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 if 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.

Question 2:  

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 all telling us is that the liquidity that is driven 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 sort of 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.

Question 3:

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 that liquidity, 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. 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.

Question 4:

Yeah. The other issue, if you're not wearing sensible shoes, is banana skins on the pavement, in the form off, 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. That was never 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, it was either going to be that the rally was shown to have been built on, ,shaky foundations or it was going to be a rally that ended up eating itself because the interest rate environment became too much of a headwind. Either way, it doesn't look like a good time to be putting those stilettos on.

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