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