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Buffett vs. Gundlach: Who Will Win the Bond Battle?

When Warren Buffett speaks, the markets listen carefully. That's because the "Oracle of Omaha," is perhaps the most successful investor of our time, and he's definitely one of the richest investors in the world today.

Berkshire Hathaway (NYSE: BRK-A) A shares have soared more than 1,878% since they began trading in January 1990, a remarkable track record of success..

Over the past several days, Buffett has given a series of interviews with CNBC, Fox Business and other media outlets in conjunction with Berkshire Hathaway's annual shareholder meeting. This event is not just a regular shareholder meeting. It's more like a convention of seriously happy, and very wealthy, investors who get together to celebrate their success in a most unlikely place -- Buffett's hometown and headquarters in Omaha, Neb.

In an interview with CNBC's Becky Quick, Buffett said that despite the fact that U.S. stocks now trade at all-time highs, they will go "far higher" in the long run. "You'll see (stock) numbers a lot higher than this in your lifetime," Buffett told the 40-year-old Quick. Buffett went on to explain that he's bullish on stocks right now, but he also made it clear that he is bearish on bonds.

Buffett warned that some investors (presumably those who have bought recently) could lose a lot of money in long-term fixed-income assets when interest rates eventually begin to rise.

Buffett took it one step further in his CNBC interview, saying that he thinks bonds are a "terrible" investment right now due to the fact that they are "priced artificially" high thanks to the Federal Reserve's asset buying programs, otherwise known as quantitative easing. The Oracle of Omaha said he didn't know when interest rates would rise or how far they would go, but he did seem quite certain that this will happen.

Now, the idea that there is a bond bubble in the works and that bond prices are destined to fall when interest rates climb is not a new thesis. It is one widely accepted by a fairly large segment of investment advisers. However, there is a flip side to the bond bubble coin, and it has a very shiny and articulate spokesman in Jeffrey Gundlach, CEO of DoubleLine Funds.

Dubbed "The King of Bonds" in a Barron's February 2011 feature story, Gundlach thinks that stocks are now overvalued, and that Treasury bonds are what investors should be buying.

This 180-degree view of Buffett's perspective was given by Gundlach during a recent presentation he made at the 10th annual Strategic Investment Conference, presented by Altegris Advisors. Although I wasn't present at this conference, I was in attendance at a February Altegris event where Gundlach personally told me he had just purchased $2 billion worth of long-term Treasury bonds for various DoubleLine funds that very morning.

In his latest presentation, Gundlach claims that contrary to widespread opinion, bonds are not in a bubble and bond yields aren't going to be going up significantly anytime soon. Here's the money quote from Gundlach: "Let me be clear... Yields are NOT going to rise anytime soon."

Gundlach went on to say that while flows into bond funds have been strong compared to equities, particularly since 2009, that does not mean that bonds are overvalued or that they are in a bubble. He also noted that there is no so-called "great rotation" happening from bonds into stocks.

The thrust of Gundlach's argument, both during his latest presentation and during the presentation in February that I attended, is that mainstream commentators fail to see that most investors actually are not under-allocated in stocks. Currently, the United States has more than 40% of household assets in stocks, which actually is the highest of all other major countries.

What this means, according to Gundlach, is there is no "stash of cash," as he puts it, waiting on the sidelines to rush into the markets. Moreover, most investors have only a small portion of their total assets in Treasury bonds. This all adds up to Gundlach's recommendation that investors need to own bonds, especially given the fact that the Federal Reserve still has, and will likely continue to keep, quantitative easing in place for some time to come.

The Buffett versus Gundlach debate over bonds illustrates just how difficult it can be for the average investor trying to make sense of the markets. Here you have two of the most closely followed and well respected market mavens around with completely different takes on one of the world's biggest asset classes.

Ultimately, reality will be the final arbiter, but for those of us trying to figure out what to do with our money, the question is who do you listen to now, Buffett or Gundlach?

For my money, I am with Buffett on this one. I think that bonds are in a bubble, and that they should be largely avoided. Moreover, even though stocks are at all-time highs, it's a lot easier to make money trading the momentum than parking it in Treasuries and hoping that interest rates -- which are near historic lows -- won't be going up anytime soon.

So, even though I am a big fan of Gundlach's market insights and expertise, I'm giving this one to the Oracle.