Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

What are hedge-fund billionaires to do without a cooperative villain?

It's more fun to imagine their world like an action film, with car crashes and explosions, tough-guy leading men doing tough-guy things and making millions of dollars in the process. Instead they have found themselves stuck in the financial equivalent of a European art-house movie: a lot of talk, talk, talk, with no explosions or jackpots in sight.

Yes, stock values seem to be too high relative to the meager economic growth seen worldwide. And yes, the U.S. junk-bond market may still appear somewhat frothy, with yields of 8 percent that are still below the decade-long historic average, especially considering that the default rate is creeping higher.

But it's unclear whether these bubbles will ever pop, or whether they're even bubbles at all. While it's disconcerting that about $10 trillion of sovereign debt worldwide has negative yields, it's hard to see what will spur a sudden reversal.

Feeling Negative
Yields on trillions of dollars of government debt have turned negative
Source: Bloomberg

In response, some money managers are questioning their purpose, their careers and the macroeconomic backdrop that led to their malaise. And they've come up with some new villains, although they're frustratingly theoretical.

It's the Federal Reserve's fault perhaps. Billionaire trader Stanley Druckenmiller said this is the "least data dependent Fed in history" with "no end game" about how to start normalizing monetary policy. Policy makers are spurring the growth of "unproductive debt that impedes long-term growth," he said at the Sohn Investment Conference in New York on Wednesday.

Or maybe more blame can be cast at the European Central Bank and the Bank of Japan, which have adopted negative-rate policies that don't seem to be igniting much growth. DoubleLine's Jeff Gundlach said at the Sohn conference that "negative interest rates are the definition of deflation."

Such policies aren't helping the stock market or economic growth and are akin to pouring gasoline on a house fire, he said. Gundlach also cast blame on the Fed by saying that its wish to raise interest rates was a mistake, which is sort of the opposite of Druckenmiller's complaint.

Miles From Nowhere
Global stocks have bounced around without a clear direction in the past year
Source: MSCI

Several years ago, it was more fun to complain about the Fed's policies. The former president of the Federal Reserve Bank of Dallas, Richard Fisher, even had the colorful allusion to "beer goggles" in a January 2014 speech, saying that investors were blinding themselves to risk in search of higher yields in a low-rate era.

He was clearly right in some ways, as were all the others who came out against prolonged easy-money policies. Valuations didn’t really make sense. But they still don’t make sense and any hope of normalization has been beaten away.

Values have jumped around. Nothing much has improved. Some argue the environment has deteriorated, given China’s slowing economy, the possibility of Britain leaving the European Union and a rising corporate default rate.

There aren’t many clean ideas anymore, leaving investors with just a general sense that things are bad, and they may get worse, but there won’t be a nice big cathartic moment. Without that it’s kind of boring. Returns are low. Things chug along without much room for bravado.

The 2 and 20 kingpins long to see themselves as Steve McQueen in "Bullitt." Instead they are stuck in a loop of "My Dinner With Andre."

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net