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Axis of anxiety: Why markets remain calm even as billionaires sound alarm bells

If you see a sweating, twitching, nervous man wandering the streets, take pity on him. He could be a billionaire.

Some of this planet's richest people are sounding the alarm about today's markets. From bond king Bill Gross to hedge fund magnate Ray Dalio to buccaneer investor Paul Singer to all-round economics guru Jeff Gundlach, they're warning of possible trouble ahead. Call them the axis of anxiety. Paradoxically, their collective tension helps to explain why markets seem so imperturbable these days. It's hard to upset an investing community that is already braced for bad news.

Investors' zen-like complacency was supposed to come under attack on Thursday when James Comey's testimony in Washington, Mario Draghi's update on the European economy, and the British election all threatened to upend the status quo.

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Instead, markets barely vibrated. And why should they?

Despite Donald Trump's tweets and Brexit concerns, the world economy is looking rather fine. Both Europe and Japan have emerged from the intensive-care unit. Fears over a hard landing in China have eased. In the United States, Trumphoria is ebbing, but it's difficult for even worrywarts to stress out over an economy that is enjoying its lowest unemployment rate in 16 years.

So what's making billionaires twitch? It isn't the prospect of an imminent recession but rather the growing sense that stock prices already reflect all this good news and then some.

By some measures, such as current share prices in comparison to average corporate earnings over the past decade, Wall Street looks as lushly valued as it has at any time except the dot-com bubble or the late 1920s.

Meanwhile, years of ultralow interest rates have convinced both companies and households to load up on debt. When the economy does turn – whenever that happens – many of those loans could sour.

"I am very concerned about where we are," Mr. Singer, a renowned activist investor and founder of Elliott Management Corp., told Bloomberg this week. "What we have today is a global financial system that's just about as leveraged – and in many cases, more leveraged – than before 2008, and I don't think the financial system is more sound."

Mr. Gross, the long-time star of the bond-investing world, agrees that U.S. markets are at their riskiest point since the financial crisis. At today's prices, "instead of buying low and selling high, you're buying high and crossing your fingers," he said Wednesday.

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Like Mr. Singer, he pointed his finger at years of low and negative interest rates. Radical monetary policy has driven up asset prices but failed to spark much in the way of real economic growth, he said.

Smart investors should ditch the United States in favour of emerging markets, according to Mr. Gundlach, head of DoubleLine Capital, a widely followed money management firm.

"We don't see a recession coming at all," he told CNBC a month ago. But he does believe rising U.S. interest rates could lead to a tough summer for U.S. stocks. On several measures, emerging-market stocks look far cheaper than their U.S. counterparts, he said.

His advice underlines the growing doubts about Trumponomics. Investors flocked to Wall Street a few months back based on Mr. Trump's promises to cut taxes and invest in infrastructure. Now, even one-time fans are losing faith.

Mr. Dalio, the billionaire founder of investment firm Bridgewater Associates, was initially bullish about the new president, but in a post on LinkedIn on Monday, he expressed concern about Mr. Trump's penchant for butting heads.

"The more I see Donald Trump moving toward conflict rather than co-operation, the more I worry about him harming his presidency and its effects on most of us," Mr. Dalio wrote.

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His worry on that score, combined with his fellow billionaires' concerns about market valuations and debt, suggest the level of anxiety is only going to increase.

Yet, as long as bond yields remain at rock-bottom levels, stocks of some sort still seem to be the best of a bad range of investing options. There's no obvious better place to turn for shelter. Sorry, billionaires, but you shouldn't count on relaxing any time soon.

A lot of people think Rob Carrick is anti-homeownership. He's not, but he doesn't want people to buy homes they can't afford to own.
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