UBS: Where are the Bubbles?

This is a pretty good list from UBS on where the bubbles might be.  I take issue with the first one, however as I definitely don’t think there’s a bubble in government bonds.  Maybe Jeff Gundlach was right when he said there’s a bubble in central banking….That said, maybe we should just swap #1 out with Japan where the equity market looks frothy to say the least:

“We take a restrictive definition of bubble. The asset has:

(1) to be valued beyond the reasonable bounds of fundamentals and
(2) could correct rapidly.

This leaves us with only five candidates.

(1) Risk free rates: Treasuries, bunds, gilts and JGBs
(2) Credit, particularly in Europe
(3) Real estate in Asia
(4) EM stock markets: Specifically: Indonesia, the Philippines and Thailand.
We would also add Mexico on the grounds that it is expensive, illiquid and
of 28 stocks that UBS covers in the region only 5 have Buy ratings.
(5) Australian banks”

Source: UBS


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Conventional Wisdumb

    Funny every time QE was halted previously rates fell and they rise when the FED buys again or expands its buying. How can you reconcile that with the idea of a bubble?

  • jswede

    that’s exactly right c-wisdom… it’s comical to see folks thinking it’s the Fed ‘holding rates down’ when the evidence (were anyone to actually look) is entirely to the contrary. This is one long balance sheet recession, with overriding deflation only temporarily interrupted by Fed intervention… in reality they are powerless and eventually 0%-something rates will prevail.

  • Andrea Malagoli

    When the US markets rally on Bernanke’s comments about the continuation of QE, are they telling us that there is no bubble in the US markets as well?

    Of course, they will wait until the bubble is way evident to concede the situation.

  • TokyoFrog

    Dear Cullen,

    I have to confess, I don’t quite understand the semi-hate with Japan. Two things if I may…

    On increasing their monetary base :
    What else are they doing that the US and Europe have not done before ?
    The market has taken off, nominal values of assets are higher (let’s wait and see what happens to real estate in Japan though) but isn’t that comparable to what we have seen in the US ?
    Should we say then that we are in bubble territory on the S&P, and the DAX ?
    GDP is expected to rise by 3.5% next quarter, JGBs are pricing an end of deflation while CDS are plunging, consumer confidence is somewhat higher…are not those early signs that the real economy might be finally picking up and with that moderate inflation too ?

    On devaluation their currency (or attempting for that matter) :
    When China and Korea engaged in their own competitive devaluation a decade ago, Japan lost market shares to often inferior products, its exporting powerhouses suffered as a consequence. Today, are they not just attempting to get those markets back (in a sort of zero-sum game you once described) ?
    Exports are currently at a mere 17% of GDP (before the Abenomics) but came from twice that figure in the late 90’s and almost half during the bubble years proving that Japan can re-grow into the exporting machine it once was, and with that drive the real economic activity.

    So isn’t it a bit premature to speak of a bubble yet ?

  • Adam P.

    P/E in Japan was 28 one month ago, now is probably around 33. Sure, incomes will be much better this year but… if this is not a bubble then what is a bubble ?

    If Japan wants inflation by cost pushing, the yen must be devauled 20% each year. Will it work ? I don’t know the future but I’ve some clues about the past and the past is telling me that it could work only in the short time.

    And all these nasty feedbacks in the system getting bigger and bigger…

    Central bankers are sorcerer’s apprentices, they don’t know about the future, they are just trying a big experiment that could blow up the laboratory.

  • pas

    Scepticism is the only bubble, and maybe gold.

  • Cowpoke

    Japan should invade North Korea, that’s should get things goin.

  • jt26

    Japan’s not in a bubble. In USD, the Nikkei is up only ~15% over SPY since the Nov. lows. We’ve all seen moves bigger than this in small and mid-cap indices. Energy is the only import product that Japan has a critical dependence.

  • jt26

    BTW I think the Yen devaluation will not be permanent; Japanese savers have proven themselves over decades to have a very strong home bias, and the decades-long declining savings rate won’t help.

  • krb

    This is the same silly logic Cullen relied on for months (cherry picked by the way, because he ignored other times when the Fed action and rates relationship did NOT confirm his thesis) …..institutional money develops a view to what they think will happen and then front runs or slowly develops a position. Use some common sense……..when the fed buying volume is ADDED to the supposedly deep and immediately prior bond buyer market, would rates rise?… definition, MORE buyers will cause them to drop if prior buyers and sellers maintained their viewpoint. Trying to explain simultaneous events as “evidence” or “causation” is worthy of MSNBC or Marketwatch. krb

  • krb

    Apologies to Cullen for the slam or slight at bringing up old views, because I think his views are evolving with more info like the rest of us….Sincerely, krb

  • InvestorX

    krb, I do not get your critique or point quite. What are you saying exactly (seems to be 3 different things)?

  • Frederick

    “silly logic”? Cullen has been dead right about interest rates for years. He’s been saying there’s no risk of rates rising because the Fed won’t let rates rise.

  • krb

    I’ve often heard and read (and probably been guilty of claims myself) that the fed is or isn’t impacting rates and then having rate behavior cited during the time the fed is doing its buying as proof of something……this is silly, in my view. What COULD be more meaningful is rate behavior at the time of an action announcement…..because that COULD be potentially new info, making a previous institutional view obsolete and in need of adjustment. By the time the fed action is being executed the institutions have picked their viewpoint and their action could seem “logical” OR “illogical” depending on the view they held and position they developed…..and institutions are the only ones that can actually move price.

  • krb

    I agree with that, but that’s not the point I was making.

  • Adam P.

    These data are from Mish’s. This doesn’t mean that I agree with him, but he is a good data miner and I’m quite sure he checks his data before publishing them:

    – YoY the Yen is down 21.82% vs. the US Dollar
    – Japanese consumer prices are still falling
    – Imports jumped 9.4%, up for a sixth straight month
    Exports up 3.8%
    – Trade balance negative for 10 straight months
    – Largest April trade deficit since 1979

    The Nikkei is a bubble.

  • Multivariate analysis

    Every time they paused QE, something blew up in Europe and forced money out of debt securities there. What if that doesn’t happen the next time?

  • Cullen Roche

    My critique of Japan is very specific to their targeting of their stock market. I view the stock market as a residual balance sheet item for most people. It doesn’t necessarily reflect the underlying economy or the corporations accurately. So, when we start to target this sort of an index through policy it can be highly destabilizing to people’s savings. That is, if you were to target the S&P 500 at 2,000 there is no doubt that the Fed could set the price there. They could do what the BOJ has done and explicitly purchase ETF’s while saying that they want prices higher. The problems arise when they set prices at levels that simply cannot be sustained or justified by the underlying asset’s fundamentals. It’s a form of putting the cart before the horse. It works until the horse runs the cart over. That’s my worry in Japan.

    And yes, it is quite different than what’s going on in Europe because the monetary systems are totally different. But it’s also different from the USA because the Fed is not being as explicit about the stock market impact. The Fed also can’t buy ETFs like the BOJ is doing so even if they talk a big talk they can’t actually back it with action. So they rely on others to follow through whereas the BOJ is actually in the market buying.

  • Anonymous

    Good point, bubble in who’s currency? Bubbles in one currency may be a value in another’s currency; hence, capital flows can distort domestic fundamentals if capital is free to roam the planet.

  • jswede

    when the Fed is buying, that ‘added demand’ is more than offset by natural buyers pulling away and chasing risk assets…

    when the Fed stops, the natural buyers more than offset the Fed’s demand by coming back into the UST market…

    clear as day.

  • Adam P.

    I agree with you and I can prove it: I own long dated US gov bonds and scandinavian gov bonds, I own a few boring US stocks but I don’t have japanese bonds and stocks and I’m very careful with EU denominated assets and for gambling Las Vegas is better than Tokyo.

  • Adam P.

    The Nikkei has been inflated by the western speculators, the more they buy, the more they have to sell yens for hedging. One day they will look down as Wile Coyote and…

  • ulysses

    The TOPIX:GDP ratio is only slightly above the median value of the last 50 years. Last fall Japanese stocks were ridiculously cheap, while corporate earnings and GDP were strengthening; JPY was falling because of the persistent trade deficit. Abenomics has supercharged trends that were already there to be seen. Too early to call this a bubble (except in Central Banking?).

  • http://pragcap Michael Schofield

    I think that a long period of low interest rates in the US will eventually push PEs up closer to those seen presently in Japan. Would that be a bubble? We’ll just have to wait and see. I’m sure a bubble is out there. Don’t worry, it will find us.

  • Boston Larry

    The long awaited correction in US equities may have begun on May 22nd mid-day. The reversal was stunning from the Dow up over 120 in the morning to being down 85 at the close, more than a 205 point swing. How deep will this correction go??

  • TokyoFrog

    Thank you for your answer.

    I am confused here. Where are you getting your figures Adam ?
    Last time I checked on my Bloomberg, the Nikkei was still in the 17 PE area.
    As of the 30th of April, popular Japanese ETFs like EWJ and DFJ were trading at 16, with a price per book of of 1.4 and price per sale of 0.7.
    Now I would not call that “expensive” per say…

    Then, about the asset repurchase, BOJ is buying 500 billions of JGBs, that is a lot but I probably do not need to tell you that they are just swapping assets.

    Then, BOJ is indeed buying Japanese Real estate and REITs but those are much smaller in comparison.
    From the BOJ website : “With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively”
    That is roughly 20% of the REIT market but the market is “only” US$200 Billion, so they are buying US$40 Billion of shares…annually.
    Now that is equivalent to buying twice the market cap of Sony.
    So in essence, the BOJ is doing buying lots of JGBs and buying stocks…but just a bit.

    I would say that they are not specifically targeting the stock market but just doing their own version of QE, just like it was done in the US.

    I am not making any judgement here, plus you have to take into account that the same experiment and market frenzy happened in the 2005-2006 with no real impact on the real economy but still calling Japan in bubble territory sounds almost…unfair !

  • Cullen Roche

    Well, the Nikkei is down 7% from its intraday high so I don’t know if we should be calling it a “bubble”, but it’s definitely madness.

  • marius

    they seriously did not mention US stocks?

  • krb

    All the contorted debate about “is it or isn’t it” a bubble seems to divert focus and attention from just using our eyes, ears and brains….

    Wouldn’t a simple definition of a bubble be……

    “…driving prices higher than they otherwise would be” – Bernanke,Ben

    We’ve all been searching, arguing, “seeing no evil and speaking no evil” about whether or not bubbles are evident, taking views that probably most depend on whether we have a nice stock portfolio or not, when our own fed chair Bernanke provided us the best definition all along! krb