Bond King Jeffrey Guru: Stock Yields ? Bond YieldsWhy a sustained credit rally is likely, and why you should not sell bonds for equities, with Jeffrey Gundlach, DoubleLine. “There is a huge loss eminating from Europe,” he says. “Avoid Europe; avoid banks.”

“Junk bonds are actually cheap now. They’ve gone from the richest [valuation] in history to a massive underperformance versus government bonds.”

“What you do is you compare the returns of one index versus the other, versus a sort of historical trend.”

“We were two standard deviations rich on that basis in March or April, which is the worse ever. And now you’re actually one and a half standard deviation cheap.”

“This thing is going to get a little bit cheaper, particularly as we move forward and rethink the earnings and default situation, which won’t be an eminent turnaround.”

“But when you think about late 2012 or 2013, you’re going to be facing higher default rates and it’s just not that likely that you’re going to get a sustained rally in credit when defaults are about to move to the upside,” he went on to say. “So it’s a lot trickier now.”

“We hated [buying emerging makets in local currencies] at DoubleLine, and there’s just been a blood bath in that area in the past month,” he said. “And … what I don’t like about [dividend-paying stocks] is it disrespects the obvious mismatch in volatility.”

“Avoid Europe, avoid banks, no invests there at all.”