The smart money thinks the Federal Reserve will finally begin to increase interest rates early this summer. The question is how much market turmoil the move will cause.
Janet Yellen's Fed will finally increase the cost of borrowing money in June, according to remarks made by top BlackRock bond investor Rick Rieder and prominent hedge fund managers Jamie Dinan and Kyle Bass at a New York charity event Monday night.
Bass, head of Hayman Capital Management in Dallas, said the market isn't fully prepared.
"I think when she moves, it's going to cause a problem," Bass said at the Portfolios with Purpose awards night during a panel discussion moderated by CNBC's Scott Wapner.
Bass said employment rates were strong but predicted a rate hike would slow economic activity if moved more than 100 basis points, or 1 percent. He noted that Hayman had "reduced risk pretty substantially" to U.S. securities in the last couple of months given that expectation.
Dinan of $25 billion York Capital Management in New York agreed with Bass on the rate increase causing a problem, but said the question was whether the problems last "five weeks or five months."
"At the end of the day, I think it's going to be turbulent but it's going to be healthy. In other words, we've got to stop this," Dinan said of ending the post-financial crisis period of aggressive monetary stimulus.
Rieder was more sanguine.
"I think markets are set up, are ready. They've been properly communicating about it," he said, BlackRock's chief investment officer of fundamental fixed income.
He added that going to a 1 percent federal funds rate from around zero was hardly a drastic move, especially given that they have traditionally been around 7 percent with similar levels of unemployment around 5 or 6 percent.
"It's A, not shocking, and B, certainly not anything close to anything but easy policy, it's just not emergency policy," Rieder said.
On positioning, Dinan said some technology companies were overvalued but overall stocks were not wildly expensive.
"I don't think it's a 'bubble' bubble," he said. But he added, "I think that some of these Nasdaq growth stock valuations are very, very, very ambitious" and predicted that some social media companies would be gone in five years.
"Most stocks, most valuations are, relatively speaking, attractive in the world of this melt-up of real assets," he said (a melt-up usually refers to investors' driving up the price of a security because they don't want to miss out on gains, rather than looking at the fundamentals).
Dinan recommended Europe as the best place to invest given renewed economic stimulus there, especially by the European Central Bank. York still has more of its assets in the U.S. than anywhere else, he noted as a caveat.
Rieder also recommended Europe for similar reasons.
"The valuations are actually pretty attractive in Europe compared to the U.S.," he said. He noted that both stocks and bonds were attractive, given the stimulus programs on the continent.
Bass reiterated his negative views on the U.S. pharmaceutical industry. He said he remains short companies that are intellectually property "squatters." He said generally the sector is "completely overvalued."
Bass also said Hayman remains positive on General Motors.
The comments were made at an event celebrating the winners of Portfolios with Purpose, a nonprofit founded by former hedge fund marketer Stacey Asher in 2011. The group stages a stock-picking competition for investors, and the winners steer money pooled from entrance fees to their favorite charities.
The 2014 "Master Class" winners were Dinan, with a portfolio return of 18.35 percent to benefit the Museum of the City of New York with $88,896; Bass (15.78 percent to benefit the Troops First Foundation with $44,493); and Oscar Schafer (14.66 percent to benefit the New York Common Pantry with $14,831).
The group has raised about $800,000 for charity.