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Central Banks Gone Wild: What Can Investors Do?

John Grant | Photographer's Choice | Getty Images

Depending on your point of view, global central bank policies either are going to imperil financial markets or simply propel prices to a place beyond imagination.

The answer, though, could be both.

Investing professionals, even the best and brightest, can't seem to make up their minds whether the U.S. Federal Reserve and its global brethren are the salvation or the doom of capital markets.

They're just trying to survive under conditions they say they've never seen before.

The Fed alone has sent its balance sheet to the $3 trillion mark in freshly created money, while central bank easing has been aggressive as well in Europe, China, Japan, and elsewhere

"All asset classes have an upward bias now — precious metals, stocks, bonds, real estate, art. That upward bias is robust and we have not experienced anything like it in our lifetimes," said David Kotok, chief investment officer at Cumberland Advisors. "The limit to which those prices can rise is beyond our normal imagination. It's huge."

That, however, is not the talk of a raving bull trying to pump up the markets. It's merely the observation of an investing veteran who believes markets are being manipulated to historic levels, putting investors in a place where they can only ride the tide — at their own future peril.

(Read More: What Will It Take to Get the Fed to Stop Easing?)

"The single most important thing for everybody in this room and everybody in the investment climate boils down to one simple issue: When does zero interest go away, by how much, and what are the early warning signs," Kotok said at the Inside ETFs conference presented by Index Universe.

Advisors will need to discern "the market's forecast of the then-impact of the then-policy announcement, which will finally show up in a change in interest rates for the central banks. Not one of us in this room has that answer," he said.

The goal, he said half-facetiously, is "to stay invested broadly in the market" and then be sure "to exit the day before the interest rate change."

(Read More: Bears on the Brink: 'I Can't Fight It Anymore')

Of course, that's not what will happen in the market when central banks do pull back — which Kotok said might not happen for five years, a time during which he said the S&P 500 conceivably could surge to 2,500, a 65 percent rise from current levels.

"The world is riskier the longer and longer it goes on," said Scott Mather, managing director and head of global portfolio management at bond giant Pimco. "Periods of calm will be interrupted by periods of roiling prices. You can't make the case that we're on a stable trajectory."

Nonsense, said well-known hedge fund manager Dennis Gartman, whose daily Gartman Letter is among the most widely read morning missives around Wall Street. Central banks, he said, have always been active in the markets.

"The world's always been this way," he said. "I don't think there's any more risk or any less risk than there ever was."

"Is there less debt?" Pimco's Mather asked.

"So what?" Gartman retorted. "What does the level of debt have to do with it?"

Gartman's assessment, though, was disputed.

Nick Colas, chief market strategist at ConvergEx and a widely read morning newsletter author in his own right, was asked to break a logjam on the panel over the importance of debt.

"The deciding vote agrees that there is always risk. The deciding vote also says that when the Fed owns 40 percent of the yield curve it's uncharted territory," Colas said. "To stick your head in the sand and say that it is not a problem is naive."

The mission, then, is to decide how much risk the market truly holds and what investors can do to hedge against the fallout.

For Mather, the best approach is to "get away from the mindset of the home bias" and invest in countries that have less activist central banks and thus more predictable markets.

(Read More: Goldman Sachs Downgrades Global Stocks as Rally Stalls)

Kotok has stuck with a long-running favor towards municipal bonds, while Gartman also holds to a central bank hedging strategy he often has espoused in his newsletter — buying gold, but with currencies other than the U.S. dollar.

Of the group, Colas was the most vanilla, recommending investors hold plenty of large-cap U.S. stocks for stability in an unstable world.

Investors also should try to find noncorrelated assets, such as precious metals that don't move in unison with stocks, he said. Correlation has heightened with increased central bank intervention.

"Correlations are still sky high," Colas said. "It simply means that when things go up and things go down you feel the pain in every piece of the portfolio."

By CNBC.com's Jeff Cox; Follow him on Twitter at @JeffCoxCNBCcom.

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