The warnings are coming thick and fast now, from inside the redoubts of the Masters of the Universe, that their world is spinning out of control. I am especially interested in the warnings from the MOTUS themselves, not because they have demonstrated any special ability to forecast, but because they are making noises in a large herd of bulls, knowing that if they set off the stampede they will get hurt.
There is no bigger bull than UBS — it’s the largest asset manager in the world, with nearly two trillion dollars in assets. It told its clients in a newsletter last month that it no longer likes stocks, and it no longer likes bonds. Where you gonna put two billion dollars? Baseball cards? [Thanks to Wolf Richter on WolfStreet.com for bringing this to light.]
“We are worried,” said the firm that depends on the giddy optimism of investors. “Concerned about valuations,” UBS called the stock market “stretched…the market has continued its rally with little fundamental improvement to support it. This divergence is becoming uncomfortably large.”
How about the bond market, then, the traditional refuge when the stock market goes off its meds and goes all catatonic? “We don’t like credit,” says UBS flatly. Too much money has flowed to too many shaky, highly leveraged companies, and UBS expects defaults to begin in six to 12 months.
And it’s not just the companies that have been on a borrowing binge; financiers have been borrowing money with which to buy — and incidentally run up the price of — stocks. These gamblers are subject to calls when they get under water, when their stocks’ value falls below their debt. Unlike mortgage lenders, these creditors do not tolerate submarine assets, they call the loan, as in right now.
Hence UBS’s third worry: “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.” “Volatile scenario?” “Over-reaction?” They mean crash.
UBS says in its newsletter that it is trimming risk — that is, selling stocks and bonds — as fast as it can without triggering the very crash it fears, which it could easily do. Talk about risky business.
The fear of imminent disaster has spread to the pre-stock market — the world of venture capitalism, where the Next Big Thing is spun up and prepared for its IPO (Initial Public Offering of stock). These are the geniuses that precipitated the dot-com collapse of 1999. Remember? Enormous investments in enterprises that had only a vague idea of doing something with dot-com at the end of it, who hired a large staff, rented posh offices, and blew all the money on sushi parties? Remember them? They’re back.
Bill Gurley is a general partner at the venture capital firm Benchmark. His hair is on fire. He told the Wall Street Journal (paywall) recently that venture capitalists are throwing a tsunami of money at tech startup companies that don’t know how to do anything but spend money. They talk about the Next Big App, but what they do is lease posh offices (for ten years at a time), hire expensive people, splurge on sushi lunches and schmooze for their next injection of investment cash.
Take Snapchat, the photo messaging app whose wrinkle is, the message disappears after a few seconds. It’s very popular with people who don’t want their thoughts to stay around long. In the high-altitude world of venture capital, this firm is “valued” (in this context, “value” means the amount of money they could get from investors if they asked) at 10 billion dollars. The company has no revenues.
Crazy investing and crazy spending; what could go wrong? The last time the music stopped, in 1999, about half the tech firms in Silicon Valley simply evaporated, and 700,000 jobs were lost. They’re doing the same thing again, to see if the results are different.
The Wall Street Journal, unaccustomed as it is to downer stories like this, checked with some other venture capital MOTUs and found ten of them — ten! — who agree with Gurley that the jig is just about up.
With that many people tiptoeing to the exits, should we keep dancing in this crowded theater?