Wolf Richter: UBS Warns Everything Is Overpriced, Prepares For Sell-Off

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

UBS “leapfrogged” – as Bloomberg called it – Bank of America as the world’s largest wealth manager with $1.7 trillion in assets, up 9.7% from a year ago. Global wealth management assets rose 8.7% to $18.5 trillion. These firms get to manage part of the wealth that central-bank policies have generated at the top. So they have some responsibilities, like helping their clients escape the sinewy arm of the taxman, driving valuations ever higher with their trillions – “doing God’s work,” as Goldman CEO Blankfein had put it so eloquently – and preserving their clients’ wealth when the going gets tough.

And UBS just warned in its latest Weight Watcher that the going will get tough. The report is subtitled chillingly, “We are worried. We reduce risk – for now.”

The warnings are surrounded by terms of flimsy optimism: “The world is slowly recovering and we do not think we are approaching the top of the cycle yet.” Or “the stock market should continue to rally.” These and similarly soothing terms are supposed to make us feel less panicky, apparently, about the harsh reality delineated in the report.

Turns out, “it is now time to scale down risk.” They’re “concerned about valuations.” They reuse Fed Chair Yellen’s term, but in a much broader sense, pointing out that “equity markets are stretched,” all of it, not just social-media and biotech stocks. The fixed income market and the credit market have become “quite rich.” A tsunami of capital washed into risky assets, and “the market might be ahead of itself.” In fact…

The market is “too complacent and could correct rapidly.”

There was already a first signal last week when the Banco Espírito Santo (BES) in Portugal blew up. It shouldn’t have mattered outside Portugal. Yet it hit hard “a variety of asset classes over the world.” UBS doesn’t think it was the start of another systemic banking crisis.

Rather we think the event tells us a story about market positioning and market pricing: we think the market is stretched. If this is true, the market is already pricing most of the potential good news and is prone to react to bad news.

Soothing words elsewhere to the contrary, UBS is getting cold feet about equities. “The recent momentum in markets is difficult to justify,” it warns. Among the indicators:

Our economic surprise index has been very highly correlated with the S&P 500 until the beginning of last year. Since then the market has continued his rally with little fundamental improvement to support it. This divergence is becoming uncomfortably large.

And UBS thinks one of the catalysts for a market correction could be “the disappointment” from corporate earnings reporting season. It’s particularly worried about the Q3 and Q4 outlook: “estimates seem to be too high, and we are starting to see companies spend less on buybacks (EPS supportive) and more on M&A.”

Conclusion? Trimming long equity positions “before the end of the year.”

Beyond equities, it’s even worse: “We don’t like credit,” UBS says categorically. In the US, it expects the default rate to increase “on a 6-12 month horizon,” causing spreads to widen – and losses for those who hold the paper.

Further, the market is “too sanguine on inflation” in the US and is underpricing inflationary pressures, which are “trending up.” The market has “a high conviction on a prolonged period of low inflation,” and is “not positioned for higher inflation.” Instead, fund-flow data indicates that “investors are selling their protection.” So UBS sees a “correction.” The “re-pricing” will be accompanied not only by higher rates, but also more volatility. It expects 10-year Treasuries to yield 3.4% by the end of the year, up from 2.48% today. Spreads will widen. In addition, “the Fed’s tone is changing,” and it could raise rates sooner and faster than is priced into the curve.

Alas, when the sell-off starts, UBS is “very worried” about “the lack of liquidity” in both the equity and credit markets – the latter being “the best example.” And then the warning: “We have severe doubts about the ability of market makers to provide liquidity in a volatile scenario. This would pave the way for an over-reaction.” In other words, havoc.

Conclusion? Underweight fixed income.

UBS conceded that it might get the timing wrong, “but we believe the risks are asymmetric. On balance we think it is time to be tactically low on risk.” And so: “We decide simply to reduce risk over the full spectrum of assets.”

When the largest player in the wealth management industry warns that all asset classes are overpriced and too risky and that it’s time to reduce exposure across the “full spectrum of assets,” and if in fact it starts selling some of its $1.7 trillion in wealth management assets in a market that is already lacking liquidity – that act in itself can trigger the very sell-off it is warning about. So fasten your seatbelts.

As stock prices peak, M&A goes into a frenzy: 35,000 global deals will likely be made this year, promising “efficiencies” and “synergies,” hence job cuts. So Microsoft, which bought Nokia’s handset unit, is planning the largest layoffs in its history. But what followed the M&A frenzy of 2007/8? The Great Jobs Crisis! Read….  Microsoft Layoffs: Insane M&A Frenzy Leads To Next Jobs Crisis

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. K. Williams

    This is tangential to the broader piece, but I don’t see how you can call UBS the world’s largest wealth manager if it has $1.7 trillion under management. Black Rock has $4.3 trillion under management, which would seem to make it the biggest by far.

  2. greg kaiser

    That FIRE and other rentier praxis take from the economy without producing any material goods or services is obvious.

    It should also be apparent that if non productive services are necessary, they must be provided at the lowest possible cost so that they do the least harm to the economy. But ever since the Friedman delusion took hold, the rentier and FIRE section have maximized the tax they impose on all of our economic activity, in order to maximize their profits. Can you see why the economy is in real trouble, even if Wall St. is prospering?

  3. impermanence

    Legally stealing other people’s money can be tricky business, especially when you reach peak lying and peak fraud.

    As one might take notice, the majority sit around and fret that they will no longer be able to get something for nothing [until the next cycle comes ’round].

    And people wonder why nothing ever changes…

    Leadership is about sacrifice, little else. Any leaders out there in the professional class?

    1. TheCatSaid

      See last week’s post on Inverted Alchemy blog: http://www.invertedalchemy.com/2014/07/too-bad-to-be-false.html

      We have become so cynical (and rightly so), that when someone does business differently (especially in the FI sector) there’s the real danger they are not believed and the information is not trusted. (The blog is written by someone who predicted the 2008 crisis publicly several years in advance.)

      1. TheCatSaid

        I should have indicated the above link was in relation to your question about any leaders in the professional class. Fortunately there are many good folks out there, even if we might not hear their names on the news.

  4. Ray Phenicie

    “But what followed the M&A frenzy of 2007/8? The Great Jobs Crisis!”
    Are we all tired yet of elites in the financial sector wrecking our world while those dwellers in the stratosphere scramble up the wealth pyramid to even loftier heights? Is it really wealth? Meanwhile the peasants-those 98% on the lower strata of the wealth pile wonder what in the heck is going on?
    If the time should ever arrive that a real election were held with genuine choices for candidates the electorate might ask how the Monster Squid Vampire banks and their cronies are going to be pried loose from their hosts.

    I have a suggested agenda Should the day ever arrive when a progressive slate of reps are elected to Congress:
    1. In concert with private contractors draw up plans to rebuild our infrastructure. ” The American economy is not performing to the satisfaction of the American people. Total incomes are about $1.5 trillion less today — or $5,000 per person — than was anticipated in 2007 before the financial crisis began.”

    The cost for failing to invest in rebuilding the American Society of Civil Engineers finds is a $3.1 Trillion loss in GDP by 2020, and lowering household income by $3,100.
    2. All of this could be started off by making an employer of last resort to move folks over to this long term project which would employ people for four to seven years or longer. The minimum wage could be set at about $12/hr.
    3. Establish a plan for mass transit in all of the major urban areas in the nation by mandating that states establish metro transit authorities to cross county lines in setting up high speed rail to get America moving again.

  5. susan the other

    The thing I don’t understand about the price of stocks is how on earth they were so cheap for so long. They were subsidized by laws that exempted corporations from paying for the externalities of environmental pollution and stolen wages, among other things. Not to mention all the welfare they receive in subsidies and forgiven taxes by the federal and state governments. Really, if you think about it, stocks should be far more expensive than they are now because all the products they sell – across the board – are far more expensive to produce than they pretend. The pretense is important because they have to tweak their accounting and their prospectuses to look like they are “productive” when they are only productive because they can get away with plunder. But cheap sells. So, by all means UBS, go sell your stocks.

    1. TheCatSaid

      ARE (not “were”) “subsidized by laws that exempted corporations from paying for the externalities of environmental pollution and stolen wages”, right? AFAIK nothing has changed yet . . .

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