UBS Warns Worst May Not Be Over

twenty sixteen. A huge reversal, Paul, from just a few months ago when they reported pretty pretty sanguine earnings and are just an outlook that was seemed pretty good all of a sudden not so great. Yeah, And I think one of the surprising areas is the wealth management business. That's a business set for most of these big banks are supposed to be a steady eddie, predictable busins this long term positive trends, but they actually have some real

weakness there. Let's dig into that. Patrick Winter's Lumberck News Swiss finance reporter joining us Now, Patrick, what happened here? Either? Yeah? What's interesting? Where? You guys are mentioning steady, Eddie. That's kind of the market perception of what this business is supposed to be. But it's also a very market dependent business.

And you know, if if equities are down, if other types of assets are down, that actually translates into losses for the company because it means they have less assets. If they have less assets, then they get less revenues from managing those assets. And that's basically the story here today. Um. It is kind of why UBS has had a bit of a shocking quarter and alarmed some people. Um. You know, also given the read through for some of the other

banks coming up reporting in the next week. So, Patrick, how do you in any sense of how UBS is performing relative to its peers and that wealth management business. We saw that Society General also had some some weak results as well. But is there any reason to believe that this is a UBS specific issue? Interesting you mentioned that to a chief executive officers, Sir Duo Mutti was saying that in the US at least UBS is doing better than its competitors. Um. You know, it's especially flow

wise in terms of new money that it's winning from customers. Um. You know, they claim that the best. But it's also difficult to measure if that's true or not because the other US banks don't break out how much new money they get from customers um. And that's for the European banks. I guess we'll have to wait and see what they report. UM. You know, obviously it's a bit of an alarming sign if a bank like UBS comes out and says that

it's had you know, that it's lost money. It's lost money in a in a quarter when it normally gains quite a lot. Well, so let's give some numbers to this, right. They said that clients pulled thirteen billion dollars in assets during the really ugly three months that ended eighteen. Do we have a sense of whether that's stabilized. Do we have a sense of of which clients were really withdrawing money?

In terms of which clients, definitely you can say it was the ultra client, that's the big, big billionaires, And that's a warding sign because normally you think that the billionaire is the best place in this type of market environment. They had some surprising outfits in Switzerland, uh and and also in the US UM. So that's kind of geographically where it's all coming from UM and I think you know,

in terms of how they're doing versus competitors. Yeah, it's it's it's a it's difficult really to talk about that at this point. What one thing that I'm struggling to understand is this a re allocation to another firm? Is this a re allocation to alternative strategies by ultra wealthy individuals, or is this a wholesale take your money and stuff and in a maddress. I think it's I think it's

probably the latter. It's takes Really you don't you don't trust equities if I mean, if you're believing what what UBS is saying today, it's they're not moving it to competitors. They're taking the money, they're stuffing in a mattress because they don't believe they're investing in some type of other asset in the financial marketplace is going to be safe

for them at this point in time. So, Patrick, one of the things we heard from the U S and vest A banks last week was kind of a similar story, and that the very rough fourth quarter, particularly that December, but generally a fairly optimistic outlook. Did you be as share that optimistic outook for Uh, the outlook was kind of nuanced. What they said was if things continue like they did in the fourth quarter, you know, then we

could be in some trouble. But they did not specify if that would be the case or not, so they kind of left it open to interpretation. So going forward, is this any sense of what's to come for asset managers, because, as Paul was mentioning wisely, this has been sort of the the calm harbor, the safe harbor for a lot of banks is the wealth management division. Is this sort of sounding an alarm saying, rethink that? I think so? I think it is. You just really have to watch

the markets. You know, if if equity markets keep going down, then you're going to see more of the same. If they rally and go up, then people in the next quarter might be saying, how Ubs this the role model wants the again, You'll just have to wait and see. Patrick, just real quickly. Uh, they start a banker for UBS, Andrea or Cell recently left. How damaging is that to that franchise If you have a big name like this guy leaving it for sure is not going to help

the investment bank. And they've got They've got two guys who have replaced him. They basically split his job between two co heads. But I don't think I think it's fair to say this either of them really have the same name recognition as he does. It's difficult to measure the impact of one guy. But definitely, looking at this from the outside, it's a lot for them. Yeah, maybe they don't have the name recognition. They also don't have

the paycheck that it comes with. Just how much UBS would have to compensate him for leaving his former employer, actually, how much he would have to be competated to leave UBS? Thank you so much, Patrick Winters of Bloomberg News. Well, at least so. The on again, off again trade talks between the U S and China appear to be back on again. To bring us up to date on what's actually going on between the two countries is Michael Herston. Michael is a director covering Asia for the Eurasian Group.

He's on the phone with us from New York City. Michael, thank you for joining us. I guess let's start right off the bat um. How likely is it that we will in fact get a trade agreement this year? And how limited or abroad. Do you think that agreement could be well, I think that there is a reasonable chance of getting some kind of trade agreement within h within I would put it at better than at this point.

But I think the last question you raised is a really important one, which is what kind of deal is it? And in my view, it's going to be a quite limited deal. What I mean there is that many of the lead tough issues between the two sides are not

close to being resolved. And I don't think that President Trump can really very easily declare victory by saying these issues are settled, because he'll face blowback from Congress, from Democrats, including those running for president, and from trade hawks within his administration and close to his face. So I think

what happens is we get a limited deal. Many of the tough issues continue to be negotiated, and that means that there will there will be a lot of unresolved issues hanging over the relationship, which means the US will be very slow to remove tariffs, and any agreement is at risk of breaking down if the two sides can't get past an impass on some of these very tough issues. So you think that it's very likely that We're going to get a deal done, but the deal will be

mostly useless, very limited, and possibly revoked pretty quickly. Is that right, That's right, it will be well, it will be the The use will be that it will lower the probability of the worst case outcome in terms of what the markets and trading community is looking at, which

is further escalation of the of the trade dispute. And you know, really that would come in the form of the US moving ahead with the threat to lift the tariff rate on most of the goods that the US is imported from China that are under tariff from That would be a big move. I think at this point it's becoming less and less likely that that happens, certainly in the near term. So this removes that worst case probability,

or at least it lowers it. But what it doesn't do is resolve the underlying issues, and it probably doesn't lead to a path where the US removes existing tariffs in a very quick manner, if at all. So, Michael, you mentioned that you know this is likely to be a limited deal. Um, you know, some of the thorniest issues between China and the US have historically been around

technology around intellectual property UM. Is there any scenario where you think those issues get addressed with these negotiations or is it just too difficult at this point, I think it's really hard for me to see a breakthrough happening in those areas. And it's because this this set of issues related to technology, it spans trade and national security

for both governments. When you look at um issues like the rollout of five G, next generation wireless, or AI or quantum computing, all of these are seen by both governments as being important not only for economic competitiveness, but also for military and national security advantages as well. And the US China geopolitical rivalry is heating up, so it's it's very hard for me to see Beijing making concessions in the areas of tech and innovation policy that meet

the high bar of the US. Indeed, and actually the Wall Street Journal today was reporting that several US agencies have owned that China has absolutely doubled down on their wishes and efforts to try to exert a tech dominance over the world. That said, Jijn Ping, President of China, really sounded a different note at the Party Congress in his address when he talked about quote serious dangers to the party. What was your take on that, having spent a lot of time in Beijing as a representative for

the U. S. Treasury Department. Well, it was a very interesting speech. It happened over the weekend where Jen Pain called together senior party leaders in the central government and the provinces for what's known as a seminar. And as you said, the theme was avoiding major risks for China. And I think really it's a reflection of JN Paying realizing that China faces risks on a number of fronts domestic economy, the external environment, the trade war, um, growing

geopolitical frictions with the U S UM. Really it's it's a very difficult time for the leader ship right now. But I think really important point here is that what she was saying was that it's not that the the direction of Chinese policy is a mistake. Many of these risks are the inevitable result of the course that China's plotting, which is looking to become a great power and facing blowback from the US, or on the domestic economy, restructuring

the economy, which is going to be painful. So it was a message to the leadership that China needs to say vigilant in the risks that it's facing, but not that she is preparing to change course, and I certainly don't think he is. That's interesting. Thank you very much, Michael. It's a very complicated issue. Um. That was Michael Herson, director covering Asia for the Eurasia Group, on the film

with us from New York City. I think Michael's take is likely to get some type of trade agreement in tween, but it's likely to be a limited agreement, so some of the authorities issues unlikely to be addressed. At least this year, the volatility and the energy markets reared its head once again. Today. We've got West Texas Intermediate crew down about a dollar fifty seven to fifty two dollars and twenty three cents per barrel. That's down almost three.

To bring us up to date on what's going on in the energy markets and maybe one impact China maybe having on global energy markets, we bring in Stewart Clickman. Stewart is the head of Energy research at c f r A. He's on the phone with us from New Jersey. Stewart, welcome to the show. I wondered if you could give us a sense just right off the top of kind of what is your call on kind of the global supply and demand situation out there for oil and what

impact China maybe having on that. Yeah, good morning, Paul. So I think I think the first UM piece of UM, I guess supply demand fundamentals. That's that's the most important, is the demand situation, and you lose China. China represents about a third of expected incremental global demand growth in so if people start getting worried that that the demand picture is going to fall apart in China, that has

a huge impact on demand overall. And I think what's happening is that the producers, you know, the OPEC plus consortium is trying to UM, trying to trying to keep pace with falling demand by trying to cut their production as well. UM and and so that's that's that's the give and take between supply demand. Right now, it seems to be UM. You know, WIL prices are up a little bit relatively the beginning of the year, but they're not up a whole lot. So I'm looking right now

it it crewed traded on the night Max. It's currently down a bit and thirteen cents barrel. Where do you see us sending the year here? Given all of these cross winds, I mean, how can you even make that kind of prediction? It's really tough, um Lesa. I would say that, you know, we're looking for w T I to be somewhere in the high stiftees on average for so on the one hand, that's up from where we are today, so that sounds like a win. On the other hand, last year a crude average sixty five a barrel.

So really, when you put it in context, we're not looking for any any great improvement in price for producers. And I think when it comes to the E N P S, I think you have to pivot towards the more defensive names, the names that are doing a better job generating cash flow in that kind of environment. So as we think about supply here, Russia has always been the wild card, very difficult to predict. They talk about cutting production, yet they don't. Um So, what's your sense

about the supply side of the equation specifically VSAV Russia. Yeah, Russia is you know, I think it was Winston Churchill said there are a riddle trapped inside an enigma, or maybe my FIRSTA, UM, they you know they are, They're gonna do what they want to do. UM. They have agreed to cuts of UM around four hundred thousand barrels a day UM they plus the others in the non OPEC piece of OPEC plus. But the December numbers, according

to the i A, show that Russia actually increased production. UM. So you know, they have six months to kind of get their act together and get on the same page with OPEC. But the early indications are that there are some call it artistic differences between what Saudi wants and what Russia wants. Well, how much influence does OPEC have on Russia. It doesn't seem like it has much. I

don't think they really do. UM. I think, you know, in UM, when oil prices fell through the floor and landed around twenty six dollars a barrel, everyone was on the same page because twenty six dollars about worked from nobody. UM. I think that Russia's cost structure is perhaps UM a little better UM than than Saudi's is. Keep in mind that Saudi has all sorts of social programs that I need to pay for, and I think that Saudi's desired number is probably higher than USh is at this point.

So I've been seeing data at point after data point showing that US production has risen to new records and makes new highs every month, and I'm just wondering, how much further do we have to go? How much more can the US ramp up its production here. It's been a real surprise to the market. I would have said three months ago that I thought we were close to topping out, and yet they continued surprise. To the upside, there are some indications that, um, there's not a lot

of room left for further efficiency improvements. Um. You know, some of the producers I started talking about what they call parent parent child interference, where wells that you've already drilled are are getting in the way of wells he would like to drill. So, you know, the technology side of the battle between technology and geology, technology is still winning,

but but there is a limit. And at the moment, the expectations are that non opect growth led by the US is going to deliver more production in twent nine. I think it's going to be I think that delta is going to be less than it was though, So just real cookie Stewart and what's the preview of the earnings coming at fourth quarter earnings for some of these energy companies are is there particular areas that you're gonna stay away from? Um, you know, I think the services

space looks a little beleaguered at this point. Um. You know, they've they've they've suffered for the last couple of years. Um, in a in a weird way, it's it's they've kind of sowed the seeds of their own demise. They've gotten so good at helping producers get more oil out of the ground that um, that it doesn't take quite as many assets to deliver a lot of production growth for

the customers. So the customers are winning that battle, Haliburton reported today, and my colleague Page Marcus published a note on them, you know, maintaining a whole recommendation with them. Um, you know, in part because you know, the services you know, services pricing business doesn't look all that all that rosy right now. Unfortunately, we're going to have to leave there. Thank you so much though, for being with us. Stuart Glickman,

head of Energy Research at CFR A research from New Jersey. Well, we did get from the International Monetary Fund a bleak assessment of global growth. They forecast the weakest growth around the world in three years, and they are not blaming China frankly for their downgraded assessment of the world, but rather Europe in particular Germany. Let's talk about how that is shaping up some of the views of investors. Jack Ablin joining us now founding partner in chief investment officer

at Crescent Wealth Advisers. Jack, thank you so much for joining us from Palm Beach, Florida. I'm just wondering, do you care what the i m F says about global growth? Are they accurate and sort of relevant to you? You know, I do care about changes in their growth forecasts, and they do highlight things that are a concern of there. I remember, i am FF is really there for the emerging markets, and so I did to pay more attention to what they say in that regard rather than the

developed world. So you're not that concerned about Europe right now? Not that concerned? No, I mean, I'm and concerned about Europe, but I'm not more concerned about Europe now that the I m F has put it on their radar screen. So Jack, how concerned are you or how do you view emerging markets. You know, in that volatility we experienced in the fourth quarter of ther emerging markets got hit extremely hard. Bouncing back a little bit here in the

new year. How are you positioned in emerging markets and what is your recommendation to your clients? Sure, um, well, we are underweight emerging markets, even though I would argue from on a historical basis they're pretty cheap. In fact, they're probably the cheapest major asset class in the world

right now. Um. But there are a lot of things that need to be sorted out, not the least of which, of course, is just near term economic trajectory, but more broadly, you know, I want to really better understand this uh tipfort trade issue with China. You know, I think investors originally thought this was a tactic. Uh it is now

since morphed into a strategy. Um. And the question really is is this ultimately a policy, a policy that reverses thirty five years of outsourcing globalization and and and and finding the best um, you know, producers for the best goods, and you know, a shift to more inward focused where

perhaps this wall kind of personifies that that worldview. Well, Jack, you mentioned China, we had a guest on earlier who suggested that a deal trade deal between the US and China is possible is likely maybe odds, but that it will be a very limited deal, not have a lot of teeth into it. Assuming that's the backdrop, How important is getting a deal, any deal with China to the

overall equity markets. I think that it's important that, um, there is a dialogue, that there is some back and forth here, that this isn't just uh, you know, uh digging heels into the sand, so to speak. Um. And so I would like to make sure that there is some trade decent going on with China. UM. But you're right, I mean there's still larger issues looming relative to more

than just necessarily these these tariffs. In fact, um, there are many analysts now believe that these tariffs will will be here to stay permanently um or at least on many items. And I think businesses are going to have to adjust to that. And and that's where I have

some concern. I want to talk a little bit about UBS and what they're reported with respect of thirteen billion dollars of client withdrawals, and we were just talking about how this really came from the high net worth the ultra high net worth individuals who basically we're trying to stuff cash into a mattress. Do you adhere to the

same strategy of stuff in cash into yeah. Do you think that that's a that's a prudent thing to do to take money out of equities, cash out in the in the good days and and sort of just put money aside. Yeah. I mean, I will say, we normally don't carry much of a cash balance, and we do have a cash balance now. Um. You know, I'm not why I think that there are still, like I said, there are still things that need to be sorted out. Well, valuations among US large caps. You know, you you can

convince yourself that they're fair value. I mean, it all depends on what what metrics you want to use. I mean, anyone who's bullish today on US equities is looking at forward pe um. Those of us who look longer term, whether it's um, you know, a Schiller metric or price to book, price to sales, something that looks back today relative to the last thirty year is still argues that we're still above the seventy five percentile of our you know,

historical valuation range. So it's not as cheap as perhaps it appears. But I think more importantly, UM, you know, I watch credit conditions, and while we had this nice little bounce, I think because investor attitude has just got too negative too quickly UM last year. UM, but lenders are still tightening their purse strinks. And I think the the environment UH for liquidity and credit is not as easy as it was this time last year. And I think that creates a you know, a little more difficult

environment to to take on risk. Well, given your more I guess cautious outlook, certainly near near term, where are

you putting money to work these days? Sure? So? UM, you know, within the the the context of the world UM, US you know you could argue as fair price to overprice depending on a metric use international developed UH, you know, Europe, Japan leat UH, your Japan UK certainly cheap or at least relatively cheap to the US and probably UH slightly below fair value relative to long term UH and emerging

markets cheap. So we are underweight equity risk exposure. But within that we're tilted more towards the international space than UM here in the US. What was the most recent changed to your allocation. I think that, um, it was really this notion that um, you know, we got into this environment where interest rates were held too low for too long. Um. You know, if you look back, for example, the tailor rule would have argued that the Feds should

have started tightening back in two thousand and thirteen. And of course the Taper tantrum kind of scared uh central bankers into perhaps sitting tight uh um. And when you get an environment where rates are too cheap for too long, it's very similar to what happened in under Greenspan when he was fearful about Y two K. He was reading Edyar Denny's work about how the lights weren't going to turn on, and so he didn't have much of a technology background, and so he decided to keep liquidity among

the banks very high and interest rates artificially low. We saw what happened. We got large cap tech leading the way higher, very similar to what we had now. So possibly, um as rates start to rise domestically, yeah, we could see a shift out of large cap both and into small cap. Jack Adlin, thank you so much for enjoining us. Jack Adlin, chief investment officer and founding partner, of Crescent Wealth Advisors from Palm Beach, Florida. Thanks for listening to

the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio