Aside from a relentless barrage of deteriorating geopolitical updates almost on a daily basis, which have led even the “very serious thinkers” to pull up comparisons to the days just before World War I, it has been smooth sailing for global capital “markets” which merely continue to follow the path of least central bank balance sheet resistance. It is this relentless melt up which has seen what was once a market and is has for the past 5 years become a policy vehicle to boost confidence. We show that equity markets are stretched , but we also find that the fixed income market has become quite rich, and the same is true of the credit market. Alongside a slow-motion LBO of the entire S&P 500, as companies repurchase trillions of their shares using ultra-cheap credit, bask in the glow of complacency so vast even the Fed is openly warning against it.
It is in this context that at least one bank, has voiced an alarm against pervasive, record complacency (that no matter how bad things get, the Fed will step in a bail everyone out, in fact the worse things get the better) after UBS’ Stephane Deo released a paper titled “We are worried. We reduce risk – for now.“
The key excerpts from the report:
Firstly we are concerned about valuations. We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.
Why we are worried
