Gary Shilling Continues to See Deflation on the Horizon 23 comments
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There’s been considerable debate on the inflation versus deflation issue. Last year, this was a little more contentious. (The deflation camp has been right so far and it looks to continue that way).
The biggest deflation prognosticator has been "Mr. Long Bond" Gary Shilling. In fact, there was a link to an earlier interview on this blog. If you shorted commodities and went long bonds around then, you would have done well. For the record, he had a 100% accurate record for 2008. Shilling's forecasting an annual deflation of about 2% over the next few years, as consumers save more and the "overall supply of goods and services exceeds demand."
I came across a recent Bloomberg interview by Gary Shilling. Here's what he had to say (click here).
Outlook: His outlook is for a continuing weak economy:
- Consumer spending in recessions even in real terms seldom declines. We’ve had the worst decline in consumer spending since any post world war recession.
- PPI numbers clearly suggest we’re in deflation
- Inventories are only beginning to be liquidated. Going to take economy down for at least next 2 quarters.
- Economy will experience slow growth in the long run.
- Consumers are on a savings spree after 25 years.
- The corporate sector is deleveraging.
- Commodity producers will have less money to spend.
- Government involvement will slow us down further because of inefficiencies and protectionism.
- No strong loan demand for a long while. Lenders are not going to lend.
- So much liquidity has been destroyed in the private sector. Credit default swaps have been cut in half, taking them from 60 to 30 trillion. The total money supply M2 in the G-7 is 25 trillion. So much liquidity is being destroyed in the private sector that it dwarves what the central banks can do and have done.
The 1982 – 2000 period was a solid up phase with a big 3.6% average annual growth. He’s looking at 2% for the next 5-10 years, which is basically the secular down phase of the supercycle.
His recommendations:
- Still likes long treasuries offering 3% yield on a 2-3% deflation for a 5-6% real return.
- Likes US dollar as a safe haven.
- Recommends high quality corporate and muni bonds.
Disclosure: No positions
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On May 01 07:39 AM basehitz wrote:
> I recall many appearances Gary made on Larry Kudlow. He was often
> talked over by his cheerleading host Kudlow. As your link points
> out, he was right on many issues the crowd got wrong. My favorite
> was to short China when many permabulls considered that laughable.
> So now, as we consider the next move, he has earned credibility.
> I often say, pay attention to the ones who got it right when the
> cheerleaders refused to acknowledge problems. As for Kudlow the the
> CNBC cheerleaders, I rarely watch them any more. They cheerlead when
> they should be cautious, and they fearmonger when they should be
> looking for a bullish trade. CNBC is more likely to provide misleading
> commentary than anything we can use. Gary has a track record also,
> and has earned respect.
Lemme guess.
You bought this sucker rally the last few days now, after 100%
runs in many stocks, that equities are "cheap".
LOL
Have been and will remain in gold.
On May 01 10:21 AM Happydaze wrote:
> DONE_SONZ
>
> Lemme guess.
>
> You bought this sucker rally the last few days now, after 100%<br/>runs
> in many stocks, that equities are "cheap".
>
> LOL
You are right about the food inflation. The same thing happened in the 1930s, during an otherwise general deflation, which made food stocks (along with oil and tobacco), the ones to own. Also long bonds.
Welcome to the modern 1930s.
Support HR 1207, an Audit of the Federal Reserve:
www.govtrack.us/congre...
Find your congress person:
www.house.gov/house/Me...
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So why should one correct call last year make up for ten wrong ones. As a prognosticator, he is a waste of time. I am not an inflation hawk either, so I have no axe to grind on his current forecast.
But this guy will cost you. Here is his recommendation in 2001-2003 (I stopped following after that, I am sure it never changed) Sell Housing, Short Oil - its going to $10. Short Gold - its dropping to $120 and worst of all, the worst call of all time - short the Euro at .90. He was a mega dollar bull all through the 2000's.
I subscribed to his newsletter then, every issue was buy the dollar and bonds, sell your home and short Gold, Oil and foreign currencies. The losses were horrific.
There should be a law against allowing this guy on TV. I am unsure how he gets those spots. With his track record, he should be banned along with the Enron execs. He certainly has cost investors just as much money. Since his book in 98', he has been calling for deflation. Now he wants credit. Look at the CPI, its still a mile above the 98' level. He is broken record. Even when this recovery is roaring ahead in some future year he will still be crying deflation.
So listen to him at your own peril, his forecasting is worthless. Its hard to be as wrong as he has been since 98'. In fact, his track record might be some kind of record. Even coin flipping is 50-50. His only right investment was long bonds, but that doesn't make up for the other horrendous calls.
For anyone who thinks I am off base, just read his book - "Deflation", which was published in 1998, not 2008. Thats the key fact and one which he will not mention, he published in 1998. Since then, Gold - went to $1000 from $270, Oil - went to $147 from $10, Euro - went to $1.60 from $.83. Housing - doubled or tripled since 2000. If you did any one item he recommended, you probably lost your investment, if you did all three, you are BK now.
Please stop quoting him, lets all forget he exists and maybe he will stop showing up on TV. Lord knows I want to forget.
Demand was artificially created without any thought ever how it will be paid for other than completely mortgaging our future. All the so-called smart people leading us in Government, in industry and Wall Street have been looking only at one side of the equation: just keep stimulating demand by enticing the whole country to create a vertical debt curve, and everything will be fine. Now the debt pyramid is collapsing under its own overweight. And our leaders still don't think that there will be a day of reckoning??? Think again.
Wouldn't the deleveraging process underway in these markets only deflate the USD, as the Fed can never print enough money (which by the way does not require a buyer) to offset the hundreds of trillions of USD deleveraging? Though the Fed is surely trying.
Wouldn't there be a strong USD vs EUR simply because there is more demand for the USD to deleverage USD denominated debt than demand for EUR to deleverage EUR denominated debt?
Doesn't the Fed have more flexibility than the ECB (endogenous QE only) to increase or decrease its balance sheet? Couldn't the EUR get stuck in inflation (if they are able to contain deflation first) a lot easier than the USD from quantitative easing due to that lack of flexibility?
How can any central bank allow high inflation or stagflation? Wouldn't the notional $500 trillion in interest rate swaps cause a crisis that would make the 2008 notional $60 trillion CDS crisis look like child's play? Wouldn't central bankers sell their gold before they let that happen?
It seems to me that central bankers are indeed walking a tight rope between 0 and 2% inflation, but the USD can only gain in relation to other currencies as the deleveraging process brings us back to 1998 levels of GDP. 1998 being the year before Clinton and Congress repealed the Glass-Steagall Act.
debate! If one chooses to limit the definition of these two terms to
the classical ones according to Webster ("Inflation is an increase
in the volume of money and credit relative to available goods."......
"Deflation is a contraction in the volume of money and credit relative
to availble goods.") inflation is certainly on the horizon as the FED's balance sheet has skyrocked since last fall. However, all this deleveraging (because of toxic debt and the hesitancy of banks to lend as credit remains basically unavailable to all but a few) has
created a kind of "deflation" not in the classical sense of the word and has been in existence for some time now. All the printing presses and all the kings men can never put humpty-dumpty back together again, unless the bottomless pit can be filled. But don't hold your breath; for that is not going to happen anytime soon!
EDT
Chicago, Illinois
I'm thinking we'll see cycles of seizure,and downtrending volatility for a long while yet. As money moves out of bonds and into the market, lack of funding for govt. spending and higher mortgage rates will abort improvements in the financial markets - resulting in fresh waves of fear supressing bond yeilds? Like japans decade long downtrend, except that we are starting off in worse position - eye deep in debt.
Excess productive capacity built up at the peak of the business cycle would normally be a deflationary force (if inlation = too much money chasing too few goods) But too much of that productive capacity is in foreign lands, particularly oil. I think we're headed towards a situation where Americans will have limited ability (or inclination) to buy. Only the government ablility to spend borrowed money will keep the economy on life support.
Its a treacherous tightrope the government is on. Clearly they prefer the risk of inflation to deflation, and have the means to ensure it. But will they prefer hyperinflation over deflation? Or a severe stagflation, with no-one having purchasing power except the government? Deflation might well be the preferable course politically, and too bad about the business's who are unable to repay loans in a deflation/stagflation - more opportunity for government "bailouts" ( I think this bunch might like the idea of more nationilization).
A comment I saw here a while ago, speculating where the next bubble would form, due to all the easy money - said that the next big bubble would be government. seems plausible