People eat off the New York Stock Exchange (NYSE) on September 16, 2021 in New York City. Despite an increase in retail sales, the Dow fell lower on Thursday as investors continue to be concerned about the delta variance and news of a slight increase in jobless claims.
Spencer Platt | Getty Images News | fake images
Financial markets appear vulnerable to what could be an extreme move in either direction, according to Paul Gambles, co-founder of investment advisory firm MBMG Group.
As a result, Gambles said investors should consider sitting on the guidelines and significantly increasing their cash positions.
His comments come as market participants remain wary of a flood of risks on the horizon. These include fears of rising inflation, lingering concerns about the economic outlook amid the ongoing coronavirus pandemic, supply shortages and valuation concerns.
Some investors are also wary of the possible implications of indebted China real estate firm Evergrande, which is on the brink of default.
“Our advice is to be a bit cautious. We think the market is very well prepared waiting for what could potentially be a very, very big move,” Gambles told CNBC’s “Squawk Box Europe” on Friday.
“We have no idea which way it could go; I realize it doesn’t sound helpful, but frankly, there are so many unanswered questions right now,” he continued. “Until we start getting answers, our advice is that unless you really can afford to take what could be quite a big hit, and possibly even a permanent hit, then it’s best to stay away.”
Gambles told MBMG Group, that He says has more than $ 1.5 billion of assets under advice, has sought to raise cash levels “quite dramatically” of late, warning that market risk “suddenly spiked up and off the scale” compared to just a month ago.
Gold and gold miners were “one of the best ways to hedge risk” at the moment, he added, suggesting there was some value in Treasuries as well.
“Take those profits,” Gambles said. “You should be able to swallow the fear of missing something rather than risk what could be some pretty significant losses if we get a reversal.”
“We’re not saying there’s an absolute shock nailed here, far from it. What we’re saying is that it’s a coin toss as to whether things are right or wrong and, you know what, it has the potential to be quite extreme in any direction, “said Gambles.
He said it was the first time he had advised clients to have cash for some time.
“This is a potentially crucial moment and we have no idea whether it will be a good or bad result,” added Gambles.
‘Cash is garbage’
Not everyone is in favor of building cash positions.
Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, told CNBC’s “Squawk Box” earlier this week that investors shouldn’t deal with market risk by hiding in cash.
“Don’t keep it in cash,” Dalio said from the SALT conference in New York City. More than a year after saying “cash is garbage,” Dalio said Wednesday that he still feels that way.
Ray Dalio, billionaire investor and founder of Bridgewater Associates, pauses during a Bloomberg Television interview at the Grand Hyatt in Beijing, China, Tuesday, February 27, 2018.
Giulia Marchi | Bloomberg via Getty Images
Instead, the hedge fund billionaire said the most important thing for an individual investor was knowing “how to diversify well.”
Dalio argued that doing so across countries, currencies, and asset classes would outperform cash.
Daniel Lacalle, chief economist at Tressis Gestion, told CNBC on Friday that he expected financial markets to turn down again in October, saying that a constellation of factors could force investors to “get back to reality.”
“I think what we are likely to see first is the reaction of very aggressive expectations and very optimistic expectations about the recovery,” Lacalle said, noting that the pace of recovery is holding for now.
Lacalle said market estimates that were overly optimistic had been “integrated” into earnings and macro growth projections. Furthermore, the reduction by the US Federal Reserve and the European Central Bank, as well as concerns about a slowdown in China, will likely trigger a market correction.
The risk of a “very aggressive” correction or spillover effect in the sovereign debt market was somewhat limited, Lacalle said, as the Fed and ECB were expected to continue providing support.