This is the big question facing investors today: "When is this all going to change?" The quote comes from Luke Ellis, President of Man Group, the largest listed hedge fund in the world and was cited in the Financial Times.
The issue: When and how is the Federal Reserve going to return to a more normal monetary policy. Ellis continues: "From a purely intellectual point of view, it is interesting how central banks will reverse their policies. From a market point of view, it is uncertain and complicated."
In other words, no one really knows what to expect. And, this is one reason why the stock markets and bond markets are acting the way they are.
The author of this Financial Times piece, Miles Johnson, writes "many managers (of hedge funds) feel deeply uneasy with the lofty valuations attached to certain parts of the US stock market, and low returns offered by risky assets such as junk bonds, few are willing to step out just yet."
And this is the argument Mr. Johnson gives for the high level of stock prices in the United States and the reason why no one is really ready to make a major play.
Johnson continues that some argue "that loose central banks have actually increased the riskiness of markets as a result of their policies forcing too much money into the same assets, meaning any corrections are likely to be sharper than normal."
He quotes another major hedge fund manager: "Everyone is thinking the same and being driven into the same trade. Shifts when moving from one state to another can be difficult and abrupt. It is not healthy to have a 'rigged' market."
These investors are uncomfortable, but they remain invested.
In fact, Mr. Johnson argues, "central bankers' loose monetary policy has manufactured a fake reality that is bound to end." Yet, these hedge fund people don't want the period to end because it has provided many of them such a fine return on their investments.
Note some of my recent posts. The hedge funds, private equity groups, and other wealthy investors have made plenty of money in the past year or two and the Federal Reserve has, through forward guidance, guaranteed extremely low future interest rates.
And, the information being released in recent weeks indicates that the gain in wealth - through stocks and housing - has not been the middle class or anyone near it but has flown toward the big investors.
Mr. Bernanke achieved his desired "wealth effect" but it is not increasing consumer spending and it is not spurring the economy along. The question is, "When is it all going to change?"
Mr. Johnson closes with the view that this market looks as if it will continue along its current, inconclusive path, for the time being "even if an increasing number of participants" realize the possibility of a decline and grow more.
Just one indication of this attitude is some evidence coming from the junk bond market. It appears as if investors are so desperate for yield that they are now accepting less and less protection from their investing in the "junk" area.
Tracy Alloway and Vivianne Rodrigues write in the Financial Times "Insatiable investor demand for higher-yielding securities has helped push protection for buyers of junk-rated bonds to its lowest level on record, Moody's has warned."
They go on:
"With investors flocking to the higher-yielding securities in recent years, corporate borrowers who issue sought-after debt have had the advantage when it comes to negotiating protection.
In the loan market, deals with fewer types of investor protection have become the norm.
A majority of new leveraged loans come in 'cov-lite' form, eclipsing the 29 percent reached at the height of the leveraged buyout boom just before the global financial crisis."
The Federal Reserve and the Office of the Comptroller of the Currency have become very concerned with this development and has stated this concern publicly.
As Mr. Johnson has suggested, the world is a little "surreal" right now. Nothing quite seems to be what it is. And, then you put a lot of the other things going on in the world like Crimea and the Ukraine, Syria, the missing Malaysian air liner and such and you wonder if we will ever see "normal", whatever that is, for a long time.