Squishy Clay can be collected in a few ways.
Pokemon:
Specific Pokemon with the Litter Specialty, specifically ones you met in Bleak Beach, will give you Squishy Clay.
Ground type Pokemon with the Litter Specialty like Paldean Wooper, Clodsire and Trapinch will drop squishy clay.
Locations:
Squishy clay can also be found in the form of Clay Blocks. These can be found in Bleak Beach, or in the Withered Wasteland Caves near the northwest side after helping Onix make it rain.
Use Rock Smash on a Clay Block and it will drop one squishy clay.
Dream Islands can also sometimes spawn with Clay Blocks. After unlocking the power up abilities and food recipes in Ricky Ridges, the Pikachu Dream Island (the one that resembles Bleak Beach the most) will give a lot of squishy clay.
Hope this helped!
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