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Jeff Gundlach Corrects The "Bonds Bad, Stocks Good" Meme
While, as we recently destroyed here, the current meme is that "bonds are mispriced" due to the Fed and so holding them is an idiot's play as at some point they will normalize (which somehow means equities are a great investment - as they apparently never drop in price). DoubleLine's Jeff Gundlach appeared on CNBC this morning laying out a few very obvious (but entirely overlooked by the mainstream) reasons why a 'rise' in interest rates (and the bond price drop implicit in that) is not necessarily positive for most of the equity-type investments currently. We see four reasons why the "bonds bad, stocks good" meme is fundamentally flawed and why a great rotation remains a myth... Gundlach also warned flow-driven equity bulls, "QE effects are in the eighth inning."
Forward to 01:45 for Gundlach's view on why we should all hope that over 10-15 years bonds are an awful investment but in the short term, they are not... and then at 6:05 Gundlach explains the misunderstandings among investors (such as Leon Cooperman and Warren Buffett) that bond yields and stock prices/yields are linked...
Adding to Gundlach's view, we see four potential reasons that investors should not be 'hoping' for a bond selloff...
1) rates are low, and will stay low since The Feed needs to hold them low to fund the Government's deficit (or country will really dip into recession and equity prices will drop),
2) low rates in bonds have pushed people into bond-like stocks; this is a major problem if rates rise as those 'yield-based' equities will revalue along with bond yields by simple arbitrage,
3) higher rates on bonds could encourage pension fund flows into bonds for higher returns relative to stocks, (remember there are good risk-adjusted reasons to hold bonds) and
4) higher rates will crush the home affordability that is supposedly the cornerstone of the current recovery...
Charts: Bloomberg
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Flow is only in the 8th inning if you believe they won't up the ante.
I think we're in the 1st inning.
I think its the Eighth inning, but I'm expecting extra innings.
good one
5) Higher interest rates will also erode the value of various collateral on CDS contracts and interest rate swaps. If collateral values decline, more must be posted. If the 5Y Treasury goes from .75% to 1.5%, which could happen quite rapidly, any CDS contract collateralized by 5 year notes (which require a 3% haircut) would need to be covered by significantly more collateral. This would have a grave impact on the banking sector. It would also start an avalanche of collateral defaults on CDS and, once that starts, it all over but the crying.
No worries, they're hedged.
Hedged like Bruno Iksel at JPM and Joe Cassano at AIG. That worked out real well for them!
Guess I should have added a /sarc
Nah! I'm just a little slow. Haven't had my government issued psychotropics today.
;-)
That would put the Fed's balance sheet at about $27 trillion by my reckonin'. Even the slumbering masses might wake up and take notice...uh...nevermind, full steam ahead!
A trillion here, a trillion there, and soon enough we're talking about real money.
Numbers are meaningless at this point. Worse yet, not more than one in twenty people could even describe what the Fed's balance sheet even is, let alone the ramifications of it expanding.
But say the word "Sequestration," and boy suddenly everybody is an expert.
My knowledge of the rules of baseball is poor but I too think we have only seen the start of it. Apparently cans can be kicked very far and the general public won´t care if The Fed buys all bonds availble as long as rates don´t go up and the Ipads keep flowing,
Well, stick with what ya know, then.
You can just keep trying to "muddle-through," if you can.
Mostly good logic, but I don't like #4. If rates rise, housing affordability will remain essentially unchanged because home prices will collapse. So the higher rate will trade against the lower price resulting in the same monthly payment.
The key word there is, "home". As in, NOT an "investment". A point that is completely fucking lost on a central banker..
Fuck You Bernanke!!!
Dirty buthole sucking Fucker!!
If 1). is true, then logically we don't have to worry about 2), 3), and 4)?
Who said anything about higher rates ? The Fed will never let rates rise. Only massive selling from foreign holders could push bonds yields higher. They would hae to sell faster than the Fed could print however.
Ultimately it all blows up.... and then hopefully there are some just desserts handed out.
Rates wil still not rise then.. The Fed will just print moar and soak it all up. The jig is truly up when the Fed drains the system of all available treasuries and mortgage backed securities. Of course they will just switch to EUR denominated debt purchases then. In any case, yields will NOT be allowed to rise.
disingenuous, vacuous, fallacious, salacious, egregious, outrageous straw man. only an idiot would argue that lower bond prices would be bullish for stocks or that stocks would be a safe haven in that event. http://www.youtube.com/watch?v=EMnSpd0XRmo
I wish there were big, deep sink holes under the Capital Building, White House, Fed Reserve Bldg and the Pentagon. As well as the main corp headquarters of all the TBTF/TBTJail banks.
jeff gundlach last spoke a few months ago. The news was his short of AAPL. BUT...forgotten was the fact that he also said the US10Y had topped at roughly 2.0%. A TON more money was made by bond investors who realized that was just as important a call
The other major call Gundlach made is to avoid gold and instead trade silver long. Want to bet that's another mega call in a few months? Zero hedgers have to separate the BS from managers talking their book and a guy like Gundlach. So far he hasn't sold out.
Bottom line? Go long SLV
Hope you're right although I prefer PSLV and junk coins.
You just wrote a great summary and finished it with "go long an etf with no real physical behind it".
Just buy silver if you want to own silver. Stop playing their game.
Amen to that.
Trust them with nothing if you can help it.
Called for S&P to hit 500 last year. Maybe he was just early.
NEVER, NEVER listen to a guy on CNBC.
There is no inflation...the price of gas and food is being driven up by unicorns...not inflation.
If you guys haven't seen the Paul Tudor Jones documentary, its a must watch. http://www.tradingvix.com/2013/05/paul-tudor-jones-trader-documentary.ht...
Jeff's the man!
I disagree with Tyler's view that the rationale for the the Fed's QE efforts is to permit low cost funding of gvernment deficits. IMHO this is more of a side effect and to matter in this regard a rates' regime would need to have a time dimension coupled with a certain quantity of new debt issuance. I agree with the other three agruments in the article.
CNBC is so full of shit. They can't let Gundlach have his say... no, no. Have to bring on the jackass Cooperman to argue the equity dogma.
It's not the 8th.
It's bottom of the 9th - 2 out - it's 0-2 - nobody is on - and the home team is down by 17T runs.
Good luck everyone. It's going to suck for the next 20 years.
http://www.safehaven.com/article/29772/the-us-indices-the-reality
Since the financial crash of 2008 the western economies (US, Euro zone and Japan) have been using quantitative easing (QE). QE is not new. It was also used extensively in the 1930's. Japan has been using forms of QE for over a decade. But when one looks at the velocity of money and the money multiplier the money is not getting into the broader economy. But it is getting into the stock markets largely through the large money center banks that are the major beneficiaries of QE. Rising stock market valuations help the money center banks balance sheets. It is believed for the US at least that QE is primarily to help prop up the banking systems in the US, the Euro zone and Japan. The banking system remains saddled with huge amounts of debt that is either toxic or uncollectable.
Short Treasuries BITCHEZ!
But please do not read in thsi that you should buy stock.
Druckenmiller is right on all front about excess capacity in metals and misreading CHINA stimulus as a long term story, but there is this statement which is wrong.
"The last 11 years was an aberration, a deviation from the long-term trend of declining commodities prices as technology reduced the cost of extraction.”
Malthus is going bite his ass big time on farm commodities.