Aitken warns of 'massive bubble' in bond market Charlie Aitken of Bell Potter says there is trouble emerging in the bond, gold and Australian dollar markets, driven by the US Federal Reserve's balance sheet expansion. Picture: Renee Nowytarger Source: The Australian THE date September 14, 2012 is etched deeply in the memory of Charlie Aitken. For weeks leading up to that day, the wholesale managing director of Bell Potter -- considered one of the country's best stock pickers -- had been advising his tight group of clients to back Fortescue Metals. It was a risky call given the company was sitting on a debt pile of $9 billion, heavily exposed to the spot iron ore price which was in freefall and was being circled by short sellers. But a meeting with Fortescue chief executive Nev Power just two weeks previously left Aitken convinced the company's moment of pain had passed and he penned a note to his clients reiterating his high-conviction "buy" recommendation. On the afternoon of September 13, it all all fell apart for him. Shares in Fortescue plunged 14 per cent to $2.99. The next morning, Australia's third largest iron ore miner entered a trading halt. "When the stock went into a trading halt I thought, I'm not very religious, but please God, don't let this be the end," he told The Australian. Luckily for Aitken it wasn't, but his clients lost a lot of money. Four days later, Fortescue revealed it had secured a new $US4.5 billion debt facility, averting a potential liquidity crisis. Recalling that incident, Aitken says: "It's times like that where you go home and have quite dark moments and you feel you might not recover from it. You can recover from stocks going down and rebounding; you can't recover from putting your clients into something that goes broke. That's a cardinal sin. That episode in September provides a real glimpse into the high-stakes universe Aitken has lived and breathed since he entered the world of stockbroking. That journey started early for Aitken after a stint of work experience at a stockbroking firm immediately after finishing high school. Today, aged 40, he is one of the country's leading stock pickers and a great stock-market bull. Aitken is also unlike most of his peers in that he is quite public about his opinions, whether it be the first to call the end of the bear market last August or, more recently, tipping that the Australian dollar could plunge to US80c this year. His views polarise people and are commonly the subject of feverish debate. In a wide-ranging and candid interview, Aitken says he sees "three bubbles" in the investment landscape, reveals he is a changed man following the global financial crisis and opens up about a personal event last June which left him questioning his public profile. He also talks about Australia returning to a "multi-speed" economy but in "the complete reverse of the last five years, with Western Australia going backwards and east coast actually going forward." "I think there is a mild chance that you can see a technical recession at the headline level, but I think that will mask a growth switching from the west coast to the east coast," says Aitken. You might see quite a bounce-back from Victoria, NSW and Queensland and tourism picks up, manufacturing does a bit better, property does a bit better, traditional services do a bit better. I'm really quite bullish on the east coast, even though the headline numbers for Australia will be quite weak. On the investment outlook, Aitken sees trouble emerging in the bond market. I think the bigger chance of losing your capital is in the bond market where there is an obvious bubble led by the actions of the Federal Reserve, and that's where I would be far more careful about than worrying about capital losses in equity dividend yield stocks. "I think there is a massive bubble," he says. Gold and the Australian dollar are the two other areas where Aitken sees bubbles, and all driven by the Federal Reserve balance sheet expansion. "The key thing in riding equity strategies is actually worrying about bonds, gold, commodity prices and commodity currencies," he says. Bond yields have risen globally a little, gold has fallen a bit and the Aussie dollar has fallen 10c, he points out. "You can see that the market has given you the play book on how this will look with a little less Fed support," he adds. All of us are trying to work out what that means at a stock-picking level in Australia. While Aitken doesn't necessarily see a bubble in Australian equities, he does say there is the potential. If cash rates keep coming down in Australia, savers will be forced to take a risk. The most easy and liquid way to take that risk is to buy a bank share in Australia or buy Telstra," he says. What worries him most is not corporate earnings, unemployment in Australia or a local recession. "It's actually the volatility in equities created by cross asset currents" from bonds, commodities and currencies," he says. With bond yields rising, the dollar falling, commodity prices falling in real terms and with China looking questionable, he believes the opportunity in equity will be in building materials, steel and transport companies. He is also a " major bull on tourism," specifically inbound tourism plays such as Crown. After the global financial crisis, Aitken says much has changed in his thinking and approach to stockbroking. "If there is anything that has changed in my approach to things, it is always look at the balance sheet of the company first," he says. The one thing I am just so aware of now is debt in cyclical companies. It's just such a bad combination. Another personal lesson for him has been "to be a bit more medium-term." "Try not to get too sucked in to every short-term movement of every share price or every piece of economic data or every fluctuation of something," he says. For him now it's about trying to set a medium-term strategy and sticking to it unless it is blatantly wrong. Interestingly, Aitken believes that the investment edge in stockbroking is no longer in trading, but rather in investing, whereby you try picking a "medium-term theme, try to pick a medium-term timeframe and stick to it." "There will be periods of volatility, but I think that's how you make money in equities nowadays," he says. If you are trying to trade, you are basically trading against super computers. Well, I'm not a super computer, so I will leave that to them, and I wonder if trading is the crowded space and genuinely investing is the uncrowded space. And regardless of the technological changes hitting his industry, Aitken strongly believes stockbrokers are still relevant because there will always be a market for good advice. But he also thinks the industry has overcapacity, particularly on the institutional side, with "way too many analysts, way too many institutional dealers, way too many corporate teams." "That will take care of itself through time, as margins come down," he says. Aitken revealed a personal incident that happened last June. While on holiday with his family, someone entered his office and delivered what he describes as, "let's just say it wasn't a love letter to me." That made me consider the costs and benefits of being public and I just decided for a few months it was time to disappear for a little while. It reminds you that my public positioning on the equity market potentially has ramifications for my family, and that's the bit I didn't like.