Following are excerpts from a CNBC interview with Axel Weber, UBS Chairman and CNBC's Steve Sedgwick and Geoff Cutmore from the World Economic Forum 2018.
SS: Joining us on set, I'm delighted to say, he's been patiently waiting, is Axel Weber, the Chairman of UBS. Nice to see you, Axel.
AW: Morning Steve, Morning Geoff.
SS: Look. In terms of your line-, I like listening to people like you, because you talk eminent sense, but the problem with what you've said for the last couple of years is, you've said there are tensions building, there are issues building from the medicine coming from central banks. Now, I'm listening to you, I'm saying, 'Yes, Axel's right about this.' But where are they, sir?
AW: Right, so, what you see again this year is a massive gap opening up over the turn of the year, between sentiment, which has run away, particularly in developed markets, and the actual data. It's a 1.5% gap between sentiment and data. And, like always, the question then is how does that gap close? We think that, basically, sentiment in the market is too buoyant. There is a lot of complacency, and the fact that we have record low volatility in the market basically means there is a risk on period, investors are taking risks, but I don't think they get the adequate compensation for those risks. And that can go on for a while, but at some time, if it's got to stop, it's got to stop.
SS: It's interesting, that was in the IMF report yesterday, I thought, you know, very happy, I think the global growth was somewhere in the region of 3.7%, but the list of caveats, and we spoke to Maury Obstfeld-,
SS: Who is one of the men who put together the report. He was really concerned about the sequence of events from overvaluation, potentially higher rates, potentially some inflation, and what that means, given the fact we have huge indebtedness, globally.
AW: Right, and so far, you've seen that the main driver of what we've seen in markets, and that is the very strong increase in equity valuations, has been, and will continue to be, monetary policy. Despite the fact that the Fed has started normalization, and has mapped out how they're going to reduce the balance sheet in very, very small doses over the next years, other central banks are still expansionary. So, Global Central Bank Liquidity, which is my preferred measure, is still growing at around 10% per year, and as long as central banks create that much liquidity, markets do sit on that liquidity, and can invest it. And combine that with a record low volatility, and you do get non-sustainable investments. But, you know, at some point in the future, and I think the ECB will join the Fed, probably around September, and not too long later, Japan's going to get closer to their inflation target. So, even the Bank of Japan, eventually, will exit this policy, and then, what used to be a tailwind for markets, for years, will turn in to a headwind globally-,
AW: And-, and that, combined with demographics, and many other risk factors, could actually mean that, at the end of this year, around next Davos, we're in a much more difficult situation than we are this year.
GC: Is the early warning system operating efficiently, though? I mean, if you look around the markets, about the only market where you are seeing evidence of a shift in attitudes is in the treasury market, and we are continuing to see yields edge higher here, and I think we've now already hit Jeffrey Gundlach's concern number of 2.65 on the 10-year Treasury. Is that the early warning system beginning to operate effectively, and are we headed for another 'taper tantrum' at some point?
AW: I think the current form of monetary policy, QE and unorthodox policy, largely works through markets, and in moving off that policy, central banks, in my view, are too solely focused on the inflation impact this is having. They're not focused on a wider set of risks, and, in particular, on risks in the market. So, financial stability concerns, like the one you've just outlined, do not play a big role, when central banks decide how to exit this policy, and that may come to haunt them, later on.
SS: What about the role of investment banks as guardians of sanity, as well? Because I was so disappointed, and we're not going to name names here, because we all pretty much know who it is. For very, very eminent investment bankers saying, 'We think Bitcoin is a bubble, it's for money-launderers, we think there's a degree of illegality about it, and we think people are going to absolutely do their money on it. Those same investment bankers, within weeks, literally, are turning around and saying, 'We have client demand, hence we're going to start up some operations on it.' That, for me, is same old grubby investment banking, Axel.
AW: So, look, we're not in that camp, and we were very clear, and we do make that distinction. There's institutional clients, and institutional clients, if they want to invest in this-, and they're grownups. I mean, they know what they're doing. They have the capability of judging this risk, and if they ask us to help them exit-, to enter these markets, we need to look at that differently than retail clients. We're very clear, retail clients, who don't fully understand these products, should be protected from going in to these products, because if there is a retail client affected in the future, the question will be, again, 'Who was the bank that sold him these products?' and then the banks will be blamed, again, for what has happened. So, I do make the distinction between institutional players, who, you know, have their own fate in their hands, and if that's what they want to do, you know, good luck for them. But retail clients? I think they should rely on banks doing the sensible thing, and actually looking at them, and protecting them against developments where, either their risk bearing capacity is not, you know, high enough-, and clearly, with Bitcoin, this is a speculative investment. I don't call it currency. And retail clients do not have the risk bearing capacity, nor the knowledge, to invest in that. But, like everything, when anything goes up, you know, double digit, triple digit, retail investors look at it and say, 'Oh, I've missed an opportunity,' and then they buy in at a higher level of the market, so the risks are much more pronounced. I think we've got the right policy in place, we do not help retail investors to get in to these products, but on the institutional side, if institutional investors want to buy Bitcoin, of course we can help them do that, but we clearly warn them that this is not an investment we would advise.
GC: Axel, we were all here in '06 and '07, and, what we know in hindsight, is World Economic Forums have a pretty poor track record of predicting anything, let alone financial crisis. Is there a-, a risk that we may be here doing it all over again, this time round? That we're all sat here, talking about how great confidence is, and how things look fine, and yet, six months down the road, something has changed? Either Donald Trump's trade policies have catalyzed some kind of crisis, or we have a financial market response to these bubbles? What do you think?
AW: I've had a history of Davos meetings that I go to, and I usually have the line that, if everyone's very complacent, if nobody sees any risk on the horizon, that's when I get most worried. And this consensus that there are no risks out there? Take some extreme forms. People look at low volatility, and they're selling low volatility, as if that is a god given, and continuing for the future. That's a big risk, to do that. I think markets will come back to being more volatile. As central banks are retreating from this, and that's the big driver behind all of that, volatility in the markets will come back. Look at the Fed. I mean, they took the exit with very baby steps on interest rates. They've been very consciously reducing liquidity in a very long-term way, so they're taking it slow. I think what you're seeing at the moment, you know, and a large part of what we see in the rebound is developed countries, there's fiscal stimulus added in the US, inflation will come back. And I think the biggest underpriced risk this year is that central banks haven't really seen the impact, with all the normalizing, that this will have down the road on inflation. Look at pricing power in markets. Wages are starting to tick up. You see wage rounds that we haven't seen for years, and as those wages, you know, make their way in to, you know, pricing power of corporates, you will see higher prices, and that will mean that the central banks, at some point, you know, might have to start to hurry up. The market doesn't price it, yield curves are completely flat. If you look at treasuries, nobody is pricing in any inflation risk down the road, but we've seen inflation tick up towards targets, and there will be the point, I think sooner than later, where central banks need to react to the uptick of inflation, because that's their core mandate, and that will finally improve.
SS: Fascinating conversation, if only we could talk about IG Metall and the pilots, but we can't do that, we've got to say goodbye, but it's interesting seeing where it's happening, in Germany, especially, as well. Axel, we've got to say goodbye, thank you very much indeed for joining us-,
AW: Thank you, Steve. Thank you, Geoff.
SS: Axel Weber, the Chairman, of course, of UBS.