Research Affiliates CIO on latest market moves: ‘An awful lot of optimism has been baked in’

Research Affiliates CIO Chris Brightman joins Yahoo Finance Live to discuss the latest market action.

Video Transcript

AKIKO FUJITA: Let's bring our first guest for the hour. We've got Chris Brightman, Research Affiliates CIO. And Chris, you've been listening to Brian sort of break down the outlook that we got from the IMF today, looking at 6.4% growth in the US alone. What does that mean from a markets perspective? And how much of that optimism, you think, has already been baked in?

CHRIS BRIGHTMAN: Well, an awful lot of optimism has been baked in. You can see that from the near all-time high levels of stock market indices, but also very stretched valuations. About the only way that you can justify the lofty multiples that average stocks, and particularly the market darling metal stocks are trading at is extraordinarily low interest rates.

You can make an argument that the yield on equities is reasonable, given the extraordinarily low yields negative real rates. But if you begin to forecast that interest rates will rise and normalize, then you'd expect equities to fall back a bit as the discount rates increase. So that's why all of the focus on market pricing of inflation and Fed rate increases with respect to plotting the course of future stock prices.

ZACK GUZMAN: Yeah, and Chris, I mean, it's interesting to be having this discussion globally, what it means globally for the US to come out with the largest increase in growth in the IMF's forecast. Because when we talk a lot about inflation risks and government spending, the US really trails Europe in that regard, even though we are increasing our spending through all this.

So I'm curious to get your take on maybe why now might be the right time, if we do-- I mean, it's-- just want to stress the point, let's say the US is the only large economy to surpass the global GDP by 2022 in the absence of this pandemic. So if you think about that, it would seem to indicate-- and of course, we're hearing this from Janet Yellen-- if everybody else is agreeing to kind of maybe raise tax rates or stop that race to the bottom, then it does seem that the US would be operating from a position of strength to at least increase spending in the short term.

CHRIS BRIGHTMAN: Well, I think there's no question that the US is being much more aggressive in terms of fiscal stimulus than most other countries. And this is a global issue. It's important not to equate a national economy with the collection of companies that trade on a national stock market exchange. So the monetary policy of the US as the world's reserve currency definitely spills over and affects the pricing of securities across the world. The question is not really about levels, it's about flows and rate of change.

Larry Summers has noted that the size of stimulus provided in the US, even before we talk about the infrastructure bill now under debate, is roughly three times the size of the output gap in the United States. Is that enough to cause inflation? I think the answer for most policymakers is we just don't know. It's a bold, it's a huge program, certainly could be inflationary. You'd have to say, given the size of the stimulus relative to the size of the output gap, it does raise the risks of an inflation problem.

AKIKO FUJITA: When you look at the sheer size of the debt, though, we did hear from IMF's chief economist saying that she's not too worried about that. She believes the US has the ability to service its debt, it has improved largely because of lower rates. Do you agree with that?

CHRIS BRIGHTMAN: I do agree. It's a-- kind of a fact that given the extraordinarily low interest rates that we have at present, the debt service is not troubling at all. On the other hand, you can't spend more than you produce in perpetuity. You can certainly send out a few thousand dollars of stimulus checks to everybody in the United States.

And that's almost certainly the right thing to do for disaster relief. Many of the people that are receiving the stimulus checks probably don't need them, but I have sympathy for the idea that too much effort at carefully targeting only those that are deserving just ends up in a bureaucratic nightmare and not getting the-- the stimulus to those who really need it. But you just run a simple thought experiment. You can't send everybody a million dollars. That would obviously be inflationary.

At some point, the deficit spending, just the flows, forget about the amount of debt outstanding, that's probably not all that important, the question is, what's going on in the future? How much printing of money and sending it to people becomes inflationary? We all know that at some point it does. We just, frankly, don't know what that point is.

AKIKO FUJITA: Yeah, still a big question mark there. Research Affiliates CIO Chris Brightman, it's good to talk to you today. Appreciate you stopping by.