Billionaire bond investor Jeffrey Gundlach, founder and CEO of $137 billion DoubleLine Capital, says as long as the Federal Reserve's stimulus continues, "The stock market can stay in very overvalued territory."

Speaking to Yahoo Finance Live on Monday, Gundlach, known as the "Bond King," said that while U.S. stocks are overvalued they look cheap compared to bonds.

"[As] overvalued as stocks are relative to historical measures — like the price-to-earnings ratio, or Dr. Shiller's CAPE ratio, or price-to-book and all that sort of stuff — as overvalued as they look by historical measures, they still are cheaper than bonds, treasury bonds. And that's one of the things bolstering the U.S. stock market in addition to the stimulus and the economy," he said.

The 61-year-old bond investor contended that the Federal Reserve is "behind the scenes trying to manipulate interest rates lower at the long-end" through its quantitative easing. He pointed out that the 30-year Treasury bond "seems like it can't get above 2%, even though inflation has been increasing."

Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital, speaks during the Sohn Investment Conference in New York May 4, 2015. REUTERS/Brendan McDermid

Gundlach noted that bonds are overvalued versus typical benchmarks such as the inflation rate, economic growth, and other measures like the gold-copper ratio. Gundlach noted that typical benchmarks suggest the 10-year Treasury "should be at least 100 basis points, if not up to 200 basis points higher than it is versus economic and inflation fundamentals."

To illustrate his point on the market's dependency on the Fed, Gundlach noted the market capitalization of the S&P 500 (^GSPC) divided by the central bank's balance sheet has been "almost a constant" for the last decade.

"It's almost like a law of physics, it feels like, market physics anyway. So as long as the Fed is expanding its balance sheet, there's a tailwind behind the stock market. And, so, I think that's one of the reasons you're going to those new highs is the bonds are so overvalued."

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From an investment perspective, DoubleLine allocated to European equities for the first time in about a decade earlier this year. He noted that the European equities and U.S. stocks, which had been outperforming, have been trading in "lock-step" since mid-2020. What's more, European equities have a much cheaper price-to-earnings ratio.

While Gundlach had been bullish on the U.S. dollar in the past several months, it's "just a tactical move." He believes the dollar will "fall sharply' in the longer run.

"Historically, when you run massive budget deficits and simultaneously expanding trade deficits, it's very highly correlated to dollar weakness. What we're in right now appears to be a countertrend move that may be nearing its end as we move into the end of 2021," the investor noted.

Julia La Roche is a Correspondent at Yahoo Finance. Follow her on Twitter.

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