Gary Shilling: We're in an Age of Deleveraging

Includes: DBC, GLD, TLT
by: FinancePM10b

Renowned economist Gary Shilling last week released his book The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. Upon release of his new book, the economics doctorate sat down with Daily Finance discussing his big picture take on the economy.

In summarizing his economic viewpoints, Shilling argues that we shouldn’t be worried about inflation, but rather focus on adapting to a period of slow growth, worrying about deflation. As consumers and businesses continue to deleverage, the economy will be facing excess capacity, putting a downward pressure on prices as Americans save more and cut back on discretionary big tickets items.

Despite commodities, such as inflation-hedge gold soaring, Shilling argues that we need to keep the big picture in mind and worry about deflationary expectations as growth will be significantly hindered. As consumers spend less, and purchase generic items, putting behind brand name goods, producers will be forced to cut costs and margins. The economist adds that we need to convince people that we are a different type of environment now, and may not see the glories of the 1980s and 1990s again. Rather, Americans should focus on the new reality, and adapt to the deflationary changes where the once middle class is now arguably a lower class.

In terms of investments, Shilling argues that the 30-year Treasury bonds are his favorite, where he predicts yields to go down further to 3% from the current 4.25%, providing an investor a healthy double digit appreciation. Lastly, he forecasts that stocks will grow slowly as nominal GDP will experience slow growth. Rather, investors may see dividend yields to be favored, as banks may eventually start increasing their dividend yields once the fiasco with the government terminates.

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Although a more pessimist view of the economy, Shilling brings up a few solid points that consumers will begin to save more and we may be forced to adapt to a new normal, putting behind us the prosperous days of high growth from the 80s and 90s. Although in the short term we may be focused on inflationary pressure, Shilling is looking long term, where GDP growth is modeled to be limited.