The huge federal budget and trade deficits unquestionably are hurting the dollar, Gundlach maintained. Bitcoin, which he views as a reflection of animal spirits, has been a beneficiary.
Emerging market debt in Asia “has performed really well,” and Latin American debt is starting to come back after suffering during the early stages of the pandemic. Gundlach thinks it could continue to do well with the dollar likely to display continued weakness.
Gundlach then produced a chart of S&P 500 valuations against more than a dozen metrics, including price-to-earnings, price-to-GDP, price-to-sales and price-to-book value. All showed that large-cap U.S. stock reside somewhere between 97% and 100% of their historical highs depending on the metric.
One new metric some investors are using to justify stock valuations—price-to-projected forward earnings 24 months from now—amused Gundlach. Equity analysts, he noted, often have to revise their quarterly and yearly estimates.
Regarding the Big Six stocks—Facebook, Amazon, Apple, Alphabet, Netflix and Microsoft—Gundlach noted they have underperformed the rest of the S&P 500 since June. “The generals have left the battlefield,” he said.
It “seems a good bet” that inflation rates could rise, particularly if the Federal Reserve “crosses the Rubicon” and actually starts printing money. “The Fed isn’t there yet,” he said.
But fundamentals don’t support current Treasury yields, and with almost $2 trillion in more debt scheduled for 2021, he suspects they will continue to rise.