Bond Giants: Inflation Is, Is Not Likely

September 13th, 2012
in econ_news, syndication

Econintersect:  Two of the leading bond market investors, Jeff Gundlach and Bill Gross, have polar opposite positions about the prospects for inflation in the U.S.  However, there are some similarities in how the two view the potential for the bond market going forward:  Both think interest rates will rise.  So two different economic outlooks don't necessaily lead to two different bond market outlooks.

Last week Gross, founder, managing director, and co-CIO of PIMCO,  said in his monthly report for September that "the age of inflation is upon us" and that both stocks and bonds will suffer in the face of higher interest rates. He referred to "the dying cult of equity."

Follow up:

Gundlach, CEO and CIO od DoubleLine Capital, doesn't mention stocks specifically in his recent discussions, but does imply that developing countries should have investor focus:

Developing countries are now better fiscal stewards than developing countries, and this has played out in Europe.”

As far as inflation prospects in the U.S., Gundlach has a strong argument against it:

... inflation cannot occur unless there are corresponding increases in median household income, which he says is now falling.

Investors have been decreasing net cash flows into stock mutual funds since 2004 and have been making negative net cash flows since the peak of the stock market in 2007.


Much of the outflows from stock mutual funds has been going into bond mutual funds, as reported in July.  If investors follow the advice from both Grundlach and Gross those inflows to bond mutual funds may soon start to reverse.

John Lounsbury


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