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Stocks seem to hide corona risks
Jeffrey Gundlach warns of the consequences of fiscal policy
Dollar crash and dependence on the Super 6
The corona crisis no longer seems to be causing deep worry lines on investors’ foreheads. While the number of infections continues to rise in some countries and in particular the United States is struggling with the spread of the virus, the stock markets have already ticked off the crisis: many markets are on the way to their pre-crisis levels, and US tech values have even reached new highs.
The central banks, which flood the markets with liquidity to mitigate the economic consequences of the pandemic, are responsible for the positive mood among investors. Bond king Jeffrey Gundlach is concerned that this is not viewed critically enough by investors.
Dollar crash warning
In an interview with “Yahoo Finance”, the founder of the investment firm DoubleLine Capital LP warns that investors would hide two elementary risks.
The “fiscal explosion,” as Gundlach calls the flood of liquidity from the central banks, will ultimately weaken the US dollar. If the dollar crashes, this could break the financial dominance of the United States, the bond expert fears.
While this scenario is not imminent, “there is a risk that the dollar will reverse into a significant downward trend as the value of the dollar against other currencies is strongly affected by the growth of our budget and the trade deficit”. The US trade deficit has decreased due to the impact of COVID-19 on global growth, but at the same time the budget deficit has exploded for the same reason, Gundlach summarizes the economic situation in the United States.
The US is worse off than many other economies in which the central banks have also taken extensive fiscal measures. Gundlach believes what the European Central Bank and other monetary authorities have decided is “dwarf” compared to what the Fed has initiated. “We really bear the brunt of the fiscal explosion here.”
Dependence on the “Super 6”
Another point alongside a possible dollar crash, which investors are currently paying too little attention to, is in his opinion the record rally on the markets. Wall Street’s recent outperformance – despite an increase in coronavirus infections – is mainly driven by six tech titles that Gundlach calls “Super 6”. Facebook, Amazon, Apple, Alphabet, Netflix and Microsoft had led the recovery in the tech sector in the past weeks and months, and the past few years were also dominated by the dominance of FAANG shares and Microsoft. “Without the Super 6, there is no profit growth in US stock markets. There has been no profit growth in the past five years. If you take them out, there is nothing left,” warned the investor. He sees no profit growth at all in small caps.
In fact, he estimates the profits on the stock markets at a level of 2016, when the stock prices were still around a third lower. “The manipulation of the market has completely lost the fundamental data,” he added.
Targeting private investors
The increasing activity in the private investor sector is also dangerous for Gundlach. “The stock market has increased in part because the government has given money to unemployed people.” He speculated that part of this stimulus money would go to the stock exchange because there were always new products with which private investors could buy company shares. In particular, the options market was “unusually active”, Gundlach further warned in the interview.
He also believes that many people would normally carry their money to the casino or spend it on sports bets, but could not at the moment, so “just grab a FAANG share flyer instead”.
Many of the private investors who buy stocks on the stock exchange “don’t even know what they’re doing and have probably already lost money,” he warned.
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