5 Q&A Questions with Paul Gambles | Interview – CNBC Asia 08 June 2021

Q&A with Paul Gambles 

CNBC ASIA | 08 June 2021

Question 1: 

The right type of inflation – we’re talking about demand-driven – doesn’t it continue to be the dog that didn’t bark because what we have all over the shop is asset price inflation, whether it’s in commodities, housing, or digital assets, there’s just so much dissonance out that what should investors do?

Fed is incorrectly seeing inflation where there is none.

Answer | Paul Gambles 

Yes, that’s a great point and as you know, it’s something that we’ve been going on about for a while now. We’ve been concerned that we wouldn’t actually see any demand-pull inflation.

The real concern is that means we really have to question the so-called recovery and how strong that is. So all the data that we’re seeing suggest to us, that there hasn’t been any recovery, there hasn’t been any real rebound in demand and therefore, we’re not seeing any signs of inflation coming through. We’ve actually had a different worry to most of the Street for the last couple of months and we continue to have that worry and therefore if it doesn’t materialize, if we don’t see a really strong rebound in employment growth and therefore follow through on inflation, then we’re in a pretty weak environment. We’re back to exactly where we were before COVID and before all the stimulus, but with much higher asset prices.

So we need to be concerned that we’ve just created this huge gap between where reality has been stuck and been mired and probably got worse and where asset prices are.

Question 2:  

Right. So tactically, just walk us through Paul, why you continue to like gold and isn’t the inflation hedge, as simple as loading up all new consumer staples that have pricing power.

Answer | Paul Gambles

Two really good questions. We like gold. We particularly liked gold miners. A couple of months ago when I was on you probably remember that I was waxing about how cheap gold miners had become. That situation has changed slightly in the last couple of months in that gold has bounced about 10%, but gold miners are up more like 35%. So now we’re preferring the rotation back into bullion out of gold mining stocks. One interesting thing about gold, one reason why we liked it, is that the Street isn’t only getting inflation wrong. It actually gets consistently completely wrong.

Gold is not a great inflation hedge. In early stage inflation gold is actually a pretty poor hedge. Gold works best in two scenarios.

• One is where you get really rampant inflation, but we’re not going to go from zero to 60 immediately.
• And it also works where you get disinflation or deflation.

So because we think that because the long-term environment is still disinflationary, then actually gold is a good buy and also it actually works in the short term because of the fact that the Street is getting inflation wrong and as a consequence of that fact that it also gets gold wrong.

Also, we like consumer staples. We’ve liked these low volatility, high dividend stocks for probably about six months now and again, it was largely on price. What’s tended to happen during this stimulus phase is that a lot of money, a lot of liquidity has been created. It’s fuelled the bubble in what we call meretricious stocks, they look shiny, but actually they glisten but they’re not gold.

So, these fancy looking assets or pseudo assets that have gone to the moon have actually, sucked the air out of really solid assets, such as gold, or for instance treasuries. And if you looked late last year, then, then some of these consumer staples were so cheap that you just couldn’t leave them lying on the table. So, again, they are up quite a lot since then but there’s still good opportunity.

Question 3:

So I understand that you think one of the best ways to play, inflation, downside surprises, which is one of your main worries as you’ve been elaborating is a 25 plus treasury strips. And for viewers that are not AU fait with this kind of stuff, basically this is where you buy a bond below face value. You’re not buying for the dividend, but, you’re buying it because it’s going to pay you face value par and you don’t face mark-to-market losses. Talk us through your thinking on this.

Answer | Paul Gambles

Absolutely. The, benefit of this approach is that it’s much more sensitive to duration. It’s much more sensitive to interest rate changes.

So if you buy 25 year treasury strips and there are ETFs out there, for instance PIMCO run an ETF that has these, then you actually get something like we’ve calculated around 1.6 times the beta that you would from holding a normal 25 year treasury. So if 25 year treasury is increasing value by 10%, we’d expect 25-year treasury strips to go up by about 16%. And if we get this growth disappointment, this inflation surprise to the downside, then that kind of duration with a sort of added boost, becomes a kind of turbo-charged duration. If we get that, that’s actually probably going to be one of the best places to be.

Question 4:

Paul , we all have very loud GameStop AMC, crypto millionaires, as, as neighbours. And then what do you do with guys like that?

Answer | Paul Gambles

So everybody knows somebody who’s made millions or billions on GameStop, crypto, and all the rest of it. These things can happen. I just tend to wish them well and tell them that this is nothing to do with investment markets.

I don’t really know what it is. We offer advisory on that kind of thing for people but, we do it knowing full well that these things are not real, they’re very ephemeral and they’re an outcome of what happens when too much liquidity is forced into the markets. Let’s not spend too much time focusing on these things!

“Keep Well Clear of Liquidity-Fueled Bubble Assets.”

Question 5:

In terms off the balance of global risks, the market seemed to have taken their eye off the thorny state of affairs between the US and China, is that at that own peril Paul?

Answer | Paul Gambles

That’s one thing that really worries us that we’ve got all this playing to the peanut gallery by Biden to try and curry a bit of favor almost Trump style, which is a terrible thing to set out anybody, but we think he’s sort of falling into the trap of doing that.

The worry is that these things can really escalate and if we’ve got a fragile global economic situation, the last thing that we need is the two biggest economies to be engaging in some phony war. As you say we’ve got phony assets at crazy prices, the last thing we need is a phony war going on at the same time as that.

So it’s a really dangerous game at the moment. The market’s taking it in its stride and assuming that Biden doesn’t mean any of this stuff about the blacklist, the virus and so on but it can very, very easily, quickly spin out of control

Paul Gambles’s 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.

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