Gundlach: U.S. Stocks Are Overvalued on Almost Every Metric

you kind of highlight this quandary that investors are in and especially stock investors uh they see that there's a lot of problems they see that there's a lot of uncertainty they see that there's a lot that we don't know but the direction of the market particularly in the u.s has been very certain it's been upward another all-time high hit yesterday on the s p 500 and it's not just a small group of stocks doing the work the breadth has expanded within the s p 500 what do you say to investors who you know might agree with your assessment the music has to end at some point we just don't know when and timing is really difficult because you could miss out on a lot of gains if you are too early on thinking you know the music is going to stop well you're right but it's the your initial comment though i'd like to expand upon you said especially in the united states it's not really the united states outperforming anymore in fact that hasn't happened for quite some time the united states market had remarkable outperformance really historically unprecedented almost for the 10 years into about 2018 or 2020 where it outperformed foreign markets by uh hundreds of percentage points i mean the united states outperformed europe and and the global markets by more than double but that stopped a lot of people aren't aware of that we've at double line we follow the relative performance of global stock markets very carefully and they've all done about the same i mean this year to date the s p the dow the nasdaq they're about 10 the canadian stock market is up about 10 a lot of stock markets are about that same amount and that's been the case in fact the united states stock market is very overvalued uh on virtually every metric that you look at versus foreign stock markets uh one thing we like to look at is dr schiller's cape ratio cyclically adjusted p e ratio of stocks and it's really off the charts just as are almost all metrics of valuation u.s stock market interestingly the one thing that the u.s stock market is not overvalued versus is the us bond market it's kind of ironic here we have record valuations by virtually all metrics of u.s stocks when you compare though the yield on stocks to the yield on bonds like the 10-year treasury it's actually below average versus historical valuations is the u.s stock market so that's one of the interesting wrinkles in all this is that the rate against you against which you discount cash flows you know the treasury bond rate is so low versus economic growth and versus inflation that the stock market on that one relative value measure doesn't look all that all that rich and meanwhile the the us stock market is very overvalued versus i would say asian equities and even at this point european equities which i i bought european equities in an asset allocation fund for my clients a couple of weeks ago literally for the first time to add money to european stocks in really many years i can't remember when the last time i did it and that's largely because i think the u.s dollar is almost certain to decline over the intermediate to long term one of the things that drives the value of the us dollar that's very highly correlated to the value of us dollar is the direction of the twin deficits the united states the budget deficit which as i pointed out earlier is absolutely the only word for it is exploding it's at levels that just blow your mind and then there's the trade deficit which is also growing very noticeably for the first time in several years the u.s trade deficit had been fairly well contained was going sideways it was still a deficit but it wasn't expanding but thanks to the endless stimulus checks that are going to american citizens not surprisingly our trade deficit is expanding at a fairly noticeable rate that's because when you send borrowed money to consumers some of them save it some of them pay down their debt but some of them consume and when you send checks you're not exactly expanding your productive capacity as an economy in the united states is not expanding its productive capacity it's just expanding its propensity and wherewithal to consume so not surprisingly who's benefiting from the stimulus well it's china and southeast asia and our other significant trading partners who are are getting a tremendous benefit one thing that's really interesting that most people don't pay attention to is the price of shipping uh container ships coming from asia the price of shipping has gone up about a hundred percent uh since the lockdown because there's so much demand with these stimulus checks for things that say made in china written on them and the ships come over here but they go back uh not full in fact some of them go back largely empty and so when you ship to the united states you've got to pay the round trip on the shipping cost so when i said that right your over here um import prices are up 6.9 percent that doesn't even include the increase in the cost of shipping so there's a lot of places where you can see you know potential inflation going back to your first question the one place where you might not see inflation so much ultimately is in parts of the wage economy which is really critical if you if you don't get broad based wage inflation j power might be right and inflation might prove to be a transitory but if you start getting wages go ahead i i just want to jump in because we've spent a lot of time on the on the monetary side but you alluded to you know government debt and deficits and i'd just love to get your perspective on you know one of the proposals to pay for that which is biden's tax plan on capital gains that kind of caused a one-day shock in the markets but ultimately how do you see that playing out and is that something that concerns you in terms of hurdles going forward of course i mean capital capital gains taxes going up is obviously a negative it adds to uh the already high p e ratio of the s p 500 and other indices just becomes that much higher if you increase taxes because obviously that comes out of the bottom line and it seems clear to me that capital gains taxes are going up i don't think they're going to make it up to the 28 percent that biden is talking about i think they probably go up to 25 but they're going up and meanwhile you know other problems that exist in this tax proposal have to do with capital gains on those that make over a million dollars would go up to the income tax level that's a really big increase in capital gains taxes that's basically a doubling of the capital gains tax and you one of the arguments ironically about this tax proposal is they say one of the reasons that they think that it's so-called fair is that the real punitive aspects of the cut of the income tax only falls on a small fraction of the society so that's that's what they call fair these days uh if if if it's not broad-based i mean to me that's the not it's the opposite of fear but at any rate if you go up to 40 capital gains tax uh that's a really big problem and that's a huge headwind for uh the uh stock market and taxes like that that are really big tax increases on tiny fraction population they tend to be rather popular i saw a poll just yesterday that said that something like 64 percent of americans are in favor of raising the taxes on the high earners which is almost always the case so of course that's a headwind another huge headwind of course would be the wealth taxes that they're talking about those seem much less likely to pass to me but those those would be other issues that would greatly discourage a small business investment

Channel: Bloomberg Markets and Finance

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Id: WdYnTjYf3RI

Length: 7min 57sec (477 seconds)

Published: Tue Apr 27 2021