Ben Ashby discusses how year-end liquidity will be shaped by conflicting forces, including the US government reopening and the push for buy-sides to de-risk their books as they wrap up 2025.
In this episode, the chief investment officer also shares his view on the huge volumes in retail trading this year and the potential for a market correction. He also unpacks whether AI valuations are sustainable long-term looks at the biggest risks to be watchful for 2026, including a resurgence in US inflation.
Interview
Josephine Gallagher – So liquidity across assets has been relatively healthy this last quarter. What will be some of the biggest influences on liquidity in the coming week and in the lead up to the holidays.
Ben Ashby – we’ve got two large drivers. Number one for me, is the reopening of the US government, and that means that some of the payments that the US government should have made, in terms of government employees, in terms of some of the benefits and welfare checks that they write, will restart, so that will inject a dose of liquidity back into the economy. At the same time, you’ve got a lot of large institutions looking to close down their books for year-end for regulatory and auditing purposes. That tends to deplete liquidity. If you look at some of the trends in the market, you’ve got a lot of retail investors continuing to pile in, but you’ve got a lot of institutional investors, particularly from the hedge fund community, looking to de-risk against a market that already looks quite expensive and stretched in various places. We saw something similar in March and April. In that occasion, there was quite a sharp sell off by Fast Money investors, but at the same time, retail continued to power through. So again, we’ve got a bit of a standoff. The data would suggest retail investors participation is near all-time highs. Now the problem you have with that is generally they are the least informed investors. They are also tending to be more crowded than the most speculative and volatile stocks. And finally, retail investors are economically sensitive, so as unemployment numbers start to drift up, they tend to obviously move away from markets because they don’t have the cash flow to finance positions, so that’ll be interesting to watch in the next few weeks. My gut feel is that we’re probably due for a correction, probably a fairly decent one, up to maybe 10%. We haven’t seen the huge amount of capital destruction just yet that usually comes with a market top, and I think the US government’s large fiscal deficit remains quite stimulative in the short term. So I think we’ve still got a combination of factors that while we could see a correction, I’m not sure we’ve seen the final top just yet.
Josephine Gallagher – This ties neatly into the conversation around AI. What are your views on AI tech valuations, and are they sustainable?
Ben Ashby – We have, at the moment, the weirdest of all things, a lot of fully invested bears who are deeply skeptical of the valuations, yet due to the usual career risks that we get with trading and portfolio management, they’re forced to stay involved in the market. My personal view is, I think the sector’s overvalued and it’s not sustainable. I think there’s two or three factors you need to look at. So usually, once things move into a bubble, you tend to see debt being raised, and it’s debt being raised against speculative investments. We’ve seen that very much this year. So we’ve started to see some of the hyperscalers starting to borrow really large sums of money to do the data center build outs. The market has still focused on the hyperscalers, but actually there’s also a lot of debt going on from some of the other players in the market, generally more from a real estate background, who have already been borrowing money to be building data centers. And I think that’s really where you get to the crux of the whole trade. It’s the valuation of the data centers and the expenditure that’s been done on them. The level of building that you’re seeing at the moment is consistent with bubble building, and we’ve seen that previously with whether it was fiber optic cable in the .com bubble, or even going far back as the railways in the 19th century. The other problem you have is the investment itself is open to question. So the land has some kind of perpetual value, but at the same time, there’s question marks around actually, some of the more boring stuff that the capex is doing in terms of power centers, cooling systems and everything else. And there’s a lot of growing evidence that actually what’s been bought isn’t optimum, is actually what’s just available at the moment, in the middle of what is a building frenzy, that means the depreciation will be higher. Plus you’ve got the chips themselves, and you’ve got two factors there. You’ve got technological kind of redundancy, because effectively, more innovative chips come out, but also these chips burn out relatively quickly. In many cases, all of this matters, because when you look at the scale of the capex that’s going in, it doesn’t look like the revenues are coming through at the level you need. But then you get round to the profit factor. And if you haven’t to depreciate all this stuff a lot quicker than you previously expected, it means you have to see profits a lot quicker. And that isn’t happening either. And in the final thing, we just step back and just look at the big picture. If all these applications in AR are going to come through, you are talking about massive redundancy, hundreds of 1000s, if not millions, of people losing their jobs over the next two or three years, and that will have an impact on the economy. And occasionally, the market forgets that the whole purpose of the economy is to serve society, not the society to serve the economy. So the question we have is, how much longer does it go on for? When does the market. Market realize none of this argument particularly hangs together at the current valuations. I think there’s a reasonable chance it will continue into certainly the first half of next year, but we’re all on very difficult ground
Josephine Gallagher – Lots of potential disruption to consider there. So now looking more short to medium term and into next year, what are some of the big macro events, risks and opportunities we all need to be thinking about.
Ben Ashby – I think number one is inflation. If inflation starts to resurface, rate cuts are less likely, but more importantly, for most people, it means that the yield curve is likely to steepen, which effectively means longer-term borrowing and investments that have a longer payback period get discounted at a higher rate. Also the US is running large fiscal stimulus. The reason why we ran away from that in the 70s and 80s is because it tended to be inflationary. If that wasn’t difficult enough, the Trump administration is attempting to unwind 30 years of globalization in the space of six to nine months. So we have got tariffs being imposed, which will increase the cost of goods and input costs. And we’ve also got the crackdown on immigration, which is likely to have some kind of bearing on labor costs. But we’ve also got the question over tariffs, about were they legal or not, and that is a complex question. I think there is a reasonable case that this Supreme Court will push it back onto the US Congress who is actually responsible for taxation, and ask them to sort this out. So I suspect we might have an air pocket around that, because it could look like the US government has some very large bills to pay, and a lot of companies are going to be due a lot of compensation for tax raised that will have to be unwound. The second part of the globalization argument is the general disengagement of the United States from China. I don’t see how that’s going to end amicably. The next fallout is, as China dumps its goods on the world market, you’re going to have pushback from other locations. The European Union is probably the most obvious one for that, because effectively, China will have to find a customer that’s prepared to absorb these enormous trade surpluses. So I think that relationship is going to deteriorate more over the next 12 to 18 months, and we’ve got elements of that already with tariffs coming in on steel and various other things. The final thing to my mind is just the cost of energy. There is a widely held view in the market that it’s going to stay low for a long time, I would be skeptical about that, because I think a lot of the green technologies haven’t delivered what people said they would. I think there’s reasonable evidence that energy demand will continue to go up. And again, it comes back to our AI argument. If you think all these data centers are going to be built, then energy is drastically underpriced. So all in all, put it together, you’ve got central banks and governments acting like emerging markets. You’re going to have emerging market like outcomes. So you’re going to have inflation, if not stagflation, you’re going to have currency volatility, and you’re going to have political instability. None of that, to my mind, appears to be priced into markets. So volatility looks cheap, particularly in the bond world.
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