Gary Shilling: Say Goodbye to the Great Gatsby Era

Very few people forecast this mess in either magnitude or timing, although many now claim they did. Even some of the most prominent "permabears," while correct on many of the outcomes, did not get the investing themes correct (i.e. Peter Schiff).

Gary Shilling is about as close to anyone I can find who not only got the economics right but also made a remarkable set of calls. For example, many of us bears thought the dollar would be whipped into submission, since in 99 out of 100 cases the country that spawns a world financial crisis does not have all the Earth's money flood into its currency; Shilling got that right, saying to go long the dollar and US bonds (really the only place to hide in 2nd half 2008 as ALL historic correlations broke down).

While he was wrong on betting against commodities in 1st half 2008, he made it up in spades in the 2nd half. Unlike a Nouriel Roubini, it is much harder to make both the economic calls and the specific investing calls because the market in the short term is all about sentiment and emotions; logic is useless much of the time - hence I give him even more credence than Roubini. You can see his predictions for 2009 that we highlighted in December here [Dec 21, 2008: More Americans Finding "Fund My Mutual Fund" Blog and Discovering the Truth] Much like I have said, he believes Americans will be forced into frugality, kicking and screaming if need be.

I was wondering what he was thinking now, after this magic green shoot rally, so I was pleased to see a new series of videos from Shilling on Yahoo's Tech Ticker. I'd recommend making the 20 minutes to listen to these 3 videos, because unlike most of the hand waving, "I told you to average down even though I cost you 40-60% in 2008" punditry, Shilling has legs to stand on. Granted, he missed this monster rally but no one is going to get everything right.

I'll be interested to look back in a year and see how these views stand up; I generally agree with much of what he has been saying the past few years from an economic standpoint. Like him, I am sort of chuckling at how people continue to look to all the same people who missed the entire financial fiasco to tell them that the recovery is now at hand.

Shilling Sticks to S&P 600 Target, Despite Pressure to Cave

Back in early March when the market was in freefall, many of the hardcore bears like Doug Kass, Barry Ritholtz and Richard Suttmeier flipped to a bullish view. Not so for Gary Shilling, president of A. Gary Shilling & Co., who stuck with his bearish stance here on March 12.

Fast forward to today: despite a 30%-plus rally off the March lows, Shilling is still sticking with a target of 600 for the S&P 500 in 2009. Shilling concedes the rally has been powerful and that he's getting some "flack" from clients about possibly having missed a major turning point.

"It could be the bottom...but in my view there's enough in the way of problems out there that it probably is a bear market rally," Shilling says, citing the following main reasons why he thinks the economy will remain sluggish and the market will suffer another comeuppance this year:

• Slowing consumer spending: Thursday's weaker-than-expected April retail sales report is another reminder of how strapped Americans are in saving vs. spending mode.
• Financial deleveraging: There was a lot of "financial fluff" in derivatives, Shilling says, but they did help accelerate the so-called velocity of money. The end of the securitization boom means less easy access to credit and less financial activity from consumers and corporations alike.
• End of the commodity boom: Along with stocks, commodity prices have been rising steadily from the March lows (prior to today, that is). But the end of the speculative fever in commodities is going to mean a lot less spending from emerging markets, he says, most notably in the Persian Gulf.
• Rise of the Bureaucrats: From higher taxes to the auto industry to today's stories about the Obama administration seeking to control compensation in the banking industry, the government's role in the economy is only increasing. That can't be good for growth, Shilling says, especially as this is a worldwide phenomena.

Three Keys to End the Recession

The "green shoots" theory was looking a little brown around the edges Wednesday as stocks fell sharply following weak April retail sales data and another spike in foreclosures.

Noted bear Gary Shilling, president of A. Gary Shilling & Co., says the recent improvement in economic activity was not a sign the worst has passed but a head fake that's typical in most recessions. There have been positive quarters of GDP growth in 8 of 11 recessions since WW2, and the stock market rallied in sync, Shilling notes.

As for the current cycle, he says three trends have to emerge before it'll be safe to declare the end of the downturn, despite the Fed's efforts to flood the system with money:

• Housing bottom: A reduction in the excess inventory of homes, which he estimates are approximately 2 million (down from 2.8 million a few months ago but still very high.)
• A real resolution of the financial crisis: Like John Hussman and others, Shilling isn't convinced the stress tests results proved anything, much less marked the end of the crisis. He's concerned about rising bad loans in sectors outside of residential mortgages, including commercial real estate, auto loans, student loans and credit cards.
• More stimulus: Shilling estimates Obama's $787 billion package only contained about $200 billion will actually stimulate the economy. With Americans in savings mode, including sitting on recent tax rebates, the government is going to need to do more to "break the cycle of a consumer who is cautious, which means less spending, less production more inventory problems, and more layoffs," he says.

If those three trends turn, then Shilling sees the recession ending in early 2010. That's the potential good news. The bad news is, just like Pimco's Mohamed El-Erian, he's forecasting a "slow recovery" and subpar growth after that for many years to come.

Shilling: Say Goodbye to the Great Gatsby Era of the '80s and '90s

Much like the "Great Gatsby" era of the 1920s, the period from 1982-2000 is going to look like a "marvelous era in retrospect" and in comparison to what's coming next says

Gary Shilling, President of A. Gary Shilling & Co.

The "golden era" of growth is over says Shilling, who predicts GDP growth will average 2% over the next 10 years vs. 3.6% from 1982-2000.

"We're going to see a distinct contrast of lower growth," he says. "Not a Depression, not 'recession forever', but muted, lower growth."

Several of the key ingredients of the 1982-2000 era are either not evident presently or are being reversed, he says:

• Consumer spending: The U.S. savings rate was in the 11-12% range in 1982, and then proceeded to steadily decline into negative territory this decade. The savings rate is now moving back up, which is good for individuals but puts a dampener on overall economic activity.
• Inflation: Then Fed Chairman Paul Volcker famously "broke the back" of inflation by jacking the fed funds rate to as high as 20% in 1981. Falling inflation and falling interest rates led to higher P/E valuations for stocks. With the fed fund rate currently zero, interest rates only have one way to go - unless they go negative and a deflationary environment isn't good for stocks or the economy either. (Just ask Japan)
• Era of Big Government: Regardless of your political persuasion it's a fact taxes fell and regulations were reduced in the 1982-2000 era. Now, both trends are being reversed by the Obama administration. While that's what the majority of Americans voted for, Shilling, among many others, believes higher taxes and more regulation will lead to slower growth and a stifling of economic activity.

Comments

[Leif Peterson:]

The stock markets are a mirror image of the inverse of the unemployment rate. Over the long term, you closely predict the markets using the unemployment rate. The key factor to watch now is the change in the unemployment rate. If my calculations are correct, then about ~6 months after the rate stops increasing (i.e., remains constant or steadily declines), the next bull market should begin with gangbusters.

There will be another bubble, and it will likely be Gov't-induced. Some where some place there will be a sector that shouldn't be growing but does (housing). Just watch out for the next burst.

In 3-5 years, gold will be more valuable. Also, get some bonds, and short-term treasuries(for access to cash), with probably little cash. For stocks, I suggest long-term dividend reinvestment -- which is a long slow burn anyhow. Get some tobacco stocks, big oil(BP has a dividend yield > 8%, XOM and CVX are near 4%), and some pharmaceuticals (Lilly, Abbott, Pfizer).

May 16 03:38 PM

[TraderMark:]

Yep, in 2nd half 2008 there literally was no place to hide except US currency and US debt. All historical correlations out the door - gold held up pretty well all things being relative as well (a Schiff favorite)

Literally that was a throw away line in a long piece about Gary Shilling - I think after the Mish attack there seems to be pro and con Schiff fans ready to pounce. That was beside the point - you just never know what sliver of an article gets the troops rolling lol.

I post stuff from Schiff, Shilling, Ritholtz, Roubini, Soros, Rogers, Mish - no one has been correct 100% in every time frame. I see a lot of people are very defensive - heck I was in the Schiff camp myself so I got it wrong in 2nd half of 2008 as well. Hence the irony in some of the comments - I got the exact same things wrong hah.


On May 16 06:50 AM Carlos Lam wrote:

> Mark, I don't think you need to keep apologizing. Your article is
> understandable, succinct, and well-written. That some readers may
> disagree with you is natural, given the intelligent minds here on
> SA.
>
> You are correct that from a TACTICAL view, Peter Schiff's thesis
> didn't pan out in '08. I know of very few pundits (save Gary Shilling)
> who got '08 correct. From a STRATEGIC view, I think that Peter Schiff
> (and Jim Rogers) are correct:
>
> * US households are overleveraged, which will reduce their ability
> to purchase and will require them to save
> * US government is too costly (we have effectively had a guns-and-butter
> policy for the last 30+ years), which imposes a drag on the economy
>
> * The US currency is being printed to death, which will naturally
> cause a decline in confidence in the dollar
> * China has over 1 billion people, many of whom are well-educated,
> hard-working, and high-saving
> * Though it is an authoritarian/totalita... state, China's economy
> is on a free-market TRAJECTORY
> * The loss in confidence in the dollar--and in fiat currencies in
> general--after this crisis will propel a surge in commodities as
> investors seek to own more than just paper

May 16 04:39 PM

[TraderMark:]

Interesting comment. CBSMarketwatch story today about the happiest countries on Earth are the Nordic states, who happen to be the highest taxed. There is a lot of misinformation in America as people like simple tales. Such as "American corporations are the 2nd highest taxed at the world at 35%" - that is jibberish - I've seen many stories showing many corporations (after the games they play) paying 10-15%. There is also the belief that high taxes are always evil. It's not so straightforward - the cost benefit analysis is important. If we actually got something back for higher taxes and a quality of life would go up, I think people could think differently. People think everyone is "lazy" in Europe apparently... most of which I bet never have visited or spoken to the average person there. Many pay high taxes but get a lot back and in return for high taxes they get a huge social safety net which many would quantify as a lot easier way to live life. In America its work work work, and fend for yourself - if you are sick the wrong week you can go bankrupt. There is a happy medium but we are a very dogmatic nation and everything must be put in simple 2 minute sound bites as that is our attention span. What we have here is the miniscule ability to "strike it rich like Bill Gates" or the slightly larger ability to "get into the top 2-3%. By nature 97-98% cannot get into the top 2-3%. In return for that lottery ticket the middle class is slowly being eroded in this country, and many in the "lower 1/3rd" do not have the same quality of life as many in "those socialist countries"

I just laugh at how socialism is evil; when our country has turned the past 2 decades all about corporate socialism. At least the socialism overseas is focused on people, not corporations. Go team oligarch. Anyhow...


On May 16 09:59 AM TonyCinTX wrote:

> Just to counter the blithering political idiot above; I am a C-level
> executive in a corporation and I earn in the top few percent of the
> country and I voted for Obama without any expectation of a handout.
> He has reversed field on a few things I find important, but I was
> and remain willing to pay DOUBLE my current taxes if it would produce
> universal health care and eliminate our dependence on Middle Eastern
> oil, preferably replacing it with wind, geothermal, natural gas and
> thermal solar power. We have enough of these home grown energy sources
> to power the entire USA 250 times over our current usage.
>
> So no, I and my colleagues did not vote for Obama looking for a handout
> at the expense of the rich, we ARE the frikkin' rich, and we want
> a government that isn't wasting trillions on wars and debt when a
> few hundred billion can solve the problem here at home AND boost
> the economy at the same time.
>
> Economic collapse will devalue my assets just like anybody else's,
> and I want a government that does what I frankly cannot do, which
> is to pool my taxes and invest billions in basic research and science
> and development, so we can get divorced from the Middle East altogether.

May 16 04:47 PM

[Alphameister:]

Misery loves company! Why not focus on guys like Doug Kass who got both the collapse and the monster rally right.


On May 15 02:23 PM debtacid wrote:

> Here is a reminder for TraderMark:
>
> www.youtube.com/watch?...
>
> Interesting how TM forgives Shilling for missing the "Monster Rally"
> but faults Schiff for missing the "Investing themes"
>

May 16 07:36 PM

[Carlos Lam:]

On May 16 04:47 PM TraderMark wrote:

> Interesting comment. CBSMarketwatch story today about the happiest
> countries on Earth are the Nordic states, who happen to be the highest
> taxed. There is a lot of misinformation in America as people like

They are also, unlike us, much more ethnically and culturally homogenous. Interestingly, though, the large number of middle-eastern immigrants to the Nordic states has de-stabilized this arrangement. Nordic state citizens aren't so happy to cough up tax dollars when the recipients don't look, act, and think the way they do.

May 16 10:23 PM

[Carlos Lam:]

On May 16 09:59 AM TonyCinTX wrote:
> Economic collapse will devalue my assets just like anybody else's,
> and I want a government that does what I frankly cannot do, which
> is to pool my taxes and invest billions in basic research and science
> and development, so we can get divorced from the Middle East altogether.

Question: If the money for the "basic research and science and development" have to be taken at the point of a gun (you can be imprisoned for non-payment of taxes) then is this research and science really worthwhile? If the research was truly worthy of support, private sources would be more than happy to bankroll it.

May 16 10:26 PM

[Peter Schiff:]

Thanks Mark, lots of comments -- at least we started a good discussion. So far 2009 seems to be going our way. Perhaps by the end of 2010 this debate will be settled.


On May 15 01:18 PM TraderMark wrote:

> Hi Peter, I didn't flesh out the thought - it was "wrong in 2008"
> (latter) - the US Dollar strength and weakness in foreign equities.
>
>
> You were very right in 2006 and 2007 and I've been following your
> thoughts for a long time. Hope that helps to explain, I didn't expand
> on my thought completely and the wording above makes it look worse
> than it was ;) My comment was Schilling nailed the 2008 themes to
> a tee, unlike most of us who thought this egregious behavior would
> smash the dollar.... also there was no oasis in foreign stocks which
> on a relative basis was a theme.

May 17 11:33 AM

[nova:]

Warren Buffet, like all great investors, does not hesitate to operate outside a legal & ethical envelop. Buffet plays "a make money game" often using misrepresentations, deceits, and dishonesty to achieve his objectives.

This is just plane reality.

May 17 12:55 PM

[debtacid:]

Thanks TM, I figured that would get a rise out of ya... :)


On May 15 04:41 PM TraderMark wrote:

> I don't need that video, as I wrote above I've been following Schiff
> when others were laughing. All I stated was the thesis was wrong
> for much of 2008.
>
> I am sort of amazed there is such a backlash - life is not full of
> either / or. This reminds me of when a song is covered by a new
> band and all the fans of the old version defend it and all the fans
> of the new versions defend it as better and they both must be correct
> ;)
>
> I'd read my comments above before thinking (again) that I am not
> aware of what was said before of whom was "correct". Both parties
> mentioned were much more right than 98% of the talking heads paraded
> on financial entertainment teevee on a daily basis, and who we now
> look to for "reassurance" that everything will be fine now... <br/>

May 18 01:36 AM

[johnbee:]

As soon as the Banks have got their hands on your savings again they will be dreaming up yet another way to spend it and throw it down the tubes. They've done it with Tiger economies, emerging markets, the Net boom, sub primies, etc etc and they will do it again as soon as they can dream up a new story since they have no idea to do with money except take commission off the top and need an excuse to do it.


On May 15 10:03 AM Bull Run wrote:

> Golden era over; a major factor reflecting lack of consumer spending,
> has been the huge shift in America's saving. Prior to the collapse
> it was in negative territory,minus 6% and today it's plus 4%, and
> seems to be headed even higher. That's a 10% delta. If these saving
> rates are long lasting, the GDP, which is largerly made up of a consumer
> consumption v.s. exports, will take some serious hits in the near
> future.

May 18 07:18 AM

[Hot Richard:]

"...I want a government...to pool my taxes and invest billions in basic research and science and development..."

But that's not what you'll get. They will "pool" your taxes, though.

You should consider other entities that enable the pooling of resources that are not government.

Take the state out of the equation and get free. Just a note from the future.

May 18 09:18 AM

[Hot Richard:]

Socialism is not evil. It simply does not do what a lot of socialists claim it to do.

I would gladly pay no taxes and get no services from my government and have no funding for alternative fuels if it meant I could operate as a free entrepreneur.

I've met a lot of blithering C-level executive idiots.

May 18 09:36 AM

[TraderMark:]

I agree

In some countries the government actually works for you to some degree (Nordic countries) and does not squander every penny. I was laughing as I saw the India election results... in our country we fear it when one party has the dominant controls -we much prefer Congress be able to accomplish nothing and the GOP v DEM cancel each other out... because they are basically the same nowadays and are equally bilking us. Meanwhile in India they celebrated that one party dominates so they can get something done.

Shows you how far we've "come".

There are always happy mediums and centrist roles... but anytime you try to have a conversation that cannot be streamlined in 2 minutes people go bonkers and start throwing a tantrum. I wonder if Europeans know they are considered so evil in America - I mean... those... those... darn socialists. How do they look in the mirror each morning? How does even 1 company in that continent survive? Oh yes, Germany is the largest exporting nation on Earth... somehow they've been able to be competitive globally. But don't tell that to people who cluck like chickens when you even mention that something is amiss about the "richest country" on Earth not having healthcare for 40% of its citizens. You'll be branded a European!



On May 18 09:36 AM Hot Richard wrote:

> Socialism is not evil. It simply does not do what a lot of socialists
> claim it to do.
>
> I would gladly pay no taxes and get no services from my government
> and have no funding for alternative fuels if it meant I could operate
> as a free entrepreneur.
>
> I've met a lot of blithering C-level executive idiots.

May 18 11:51 AM

[Hot Richard:]

Americans are just now realizing that they've been European for a very long time. Now they have to step back from all the talk about freedom and freedom and freedom--not really knowing what the hell it all means anyway (and rejecting it in blind taste tests). America hasn't changed much (with some notable exceptions). Just being more open in its socialism now.

That said, a lot get throwns into "socialism" that technically isn't socialism (just big government and anti-free market). From my experience, Americans (by majority) are not fans of free markets, Austrian Eco, or even the basics of capitalism. Keynsianism, patriotism, New Deal, and an interventionist foreign policy wins their hearts.

Disagree with you on the healthcare issue, but not clucking about it. If they want public health, it's the very least they deserve (chuckle).

May 18 01:46 PM

[TraderMark:]

I think you need to have a system where govt completely stands away from everything but helping the helpless OR due to the full monty like Scandavian countries. We have some hybrid which is broken and hurting alot of people just trying to have their existence.

I call it Reverse Robin Hood!

On the healthcare we rock in specialized care but we are losing primary care and even obstricians (sp?) due to egregious costs of insurance and the lawyer class (80% of world's attorneys reside in US). A lot of "socialists" use preventative care which in theory if exercised correctly should lower costs... here we just send people to emergency room if they are not in the "insured" class. Dysfunction rules. There is a reason some Americans are flying to Thailand to get major surgeries. (cost)


On May 18 01:46 PM Hot Richard wrote:

> Americans are just now realizing that they've been European for a
> very long time. Now they have to step back from all the talk about
> freedom and freedom and freedom--not really knowing what the hell
> it all means anyway (and rejecting it in blind taste tests). America
> hasn't changed much (with some notable exceptions). Just being more
> open in its socialism now.
>
> That said, a lot get throwns into "socialism" that technically isn't
> socialism (just big government and anti-free market). From my experience,
> Americans (by majority) are not fans of free markets, Austrian Eco,
> or even the basics of capitalism. Keynsianism, patriotism, New Deal,
> and an interventionist foreign policy wins their hearts.
>
> Disagree with you on the healthcare issue, but not clucking about
> it. If they want public health, it's the very least they deserve
> (chuckle).

May 18 03:24 PM

[TraderMark:]

I think you need to have a system where govt completely stands away from everything but helping the helpless OR due to the full monty like Scandavian countries. We have some hybrid which is broken and hurting alot of people just trying to have their existence.

I call it Reverse Robin Hood!

On the healthcare we rock in specialized care but we are losing primary care and even obstricians (sp?) due to egregious costs of insurance and the lawyer class (80% of world's attorneys reside in US). A lot of "socialists" use preventative care which in theory if exercised correctly should lower costs... here we just send people to emergency room if they are not in the "insured" class. Dysfunction rules. There is a reason some Americans are flying to Thailand to get major surgeries. (cost)


On May 18 01:46 PM Hot Richard wrote:

> Americans are just now realizing that they've been European for a
> very long time. Now they have to step back from all the talk about
> freedom and freedom and freedom--not really knowing what the hell
> it all means anyway (and rejecting it in blind taste tests). America
> hasn't changed much (with some notable exceptions). Just being more
> open in its socialism now.
>
> That said, a lot get throwns into "socialism" that technically isn't
> socialism (just big government and anti-free market). From my experience,
> Americans (by majority) are not fans of free markets, Austrian Eco,
> or even the basics of capitalism. Keynsianism, patriotism, New Deal,
> and an interventionist foreign policy wins their hearts.
>
> Disagree with you on the healthcare issue, but not clucking about
> it. If they want public health, it's the very least they deserve
> (chuckle).

May 18 03:24 PM

[one eye:]

Its Never about what have you done in the last 10 years, Its always and will continue to be Always:

What have you done for me lately?

May 18 06:53 PM

[Liz:]

Add Nouriel Roubini to that list.

I give him credit for being humble enough to admit that even HE could be wrong.


On May 15 02:28 PM Robotto wrote:

> The longer the span of your prediction, the easier it is to predict.
> Even if you are wrong at the moment, you just have to keep waiting.
> Sooner or later, you will be right in one sense or another. You use
> words like "collapse" or "crash" which normally have an implication
> of something happening rapidly, but this is a free country, you can
> interpret them however you want.
>
> If I keep predicting a collapse or a boom, I'm sure it will happen
> sooner or later. It may happen quickly or it may happen over years.
> Either way, I'll be proven right.
>
> What I don't like about these people who seem to bill themselves
> as some sort of oracles is that they don't admit when they are wrong.
> They are really loud when they are right, but they are silent or
> muted when they are wrong. Unless you are God, it's not possible
> to get it all right all the time. People who have a hard time admitting
> their mistakes have very little credibility for me.
>
> Warren Buffet, for instance, is honest and up front when he is wrong.

May 31 01:59 AM

[Liz:]

Actually, china has only 100-million well-educated people (The vast majority of whom live on the coast). The other 1.7-billion people are poor farmers living in grinding poverty in China's interior.

As for their being high savers, it helps when the government doesn't provide you with Social Security or any retirement pension of any sort (The state is essentially asking the Chinese people to spend their retirement money.)


On May 16 06:50 AM Carlos Lam wrote:

> Mark, I don't think you need to keep apologizing. Your article is
> understandable, succinct, and well-written. That some readers may
> disagree with you is natural, given the intelligent minds here on
> SA.
>
> You are correct that from a TACTICAL view, Peter Schiff's thesis
> didn't pan out in '08. I know of very few pundits (save Gary Shilling)
> who got '08 correct. From a STRATEGIC view, I think that Peter Schiff
> (and Jim Rogers) are correct:
>
> * US households are overleveraged, which will reduce their ability
> to purchase and will require them to save
> * US government is too costly (we have effectively had a guns-and-butter
> policy for the last 30+ years), which imposes a drag on the economy
>
> * The US currency is being printed to death, which will naturally
> cause a decline in confidence in the dollar
> * China has over 1 billion people, many of whom are well-educated,
> hard-working, and high-saving
> * Though it is an authoritarian/totalita... state, China's economy
> is on a free-market TRAJECTORY
> * The loss in confidence in the dollar--and in fiat currencies in
> general--after this crisis will propel a surge in commodities as
> investors seek to own more than just paper

May 31 02:25 AM

[TraderMark:]

quick correction to your comment Liz. CHina has about 1.3M
Generally tossed around is 300M are middle class-ish but obviously that is disputable and middle class in 1 country is far different than another. But as you say, much of it is concentrated in the eastern coastal cities.


On May 31 02:25 AM Liz wrote:

> Actually, china has only 100-million well-educated people (The vast
> majority of whom live on the coast). The other 1.7-billion people
> are poor farmers living in grinding poverty in China's interior.
>
>
> As for their being high savers, it helps when the government doesn't
> provide you with Social Security or any retirement pension of any
> sort (The state is essentially asking the Chinese people to spend
> their retirement money.)

May 31 11:59 PM