Gary Shilling sees 2% growth in 2011 as consumers deleverage
Gary Shilling spoke with Bloomberg’s Tom Keene yesterday in a wide-ranging interview. I have posted the video below for you to watch. But let me say a few words about the interview.
First, it is noteworthy that in this multi-faceted interview Bloomberg chose the title "Shilling Says Commodity Markets ‘Clearly in a Bubble’. I see this as confirmation of the increasing worry many of us have regarding the ever-increasing prices of commodities, especially energy and agricultural varieties. Yesterday I wrote another post on the topic of food price inflation. Just this morning, I noted two more articles on emerging markets related to this issue. One on the tragic Brazil floods that have left 500 dead. And the second on India confirming my view from the latest food inflation post that we are likely to see export restrictions on energy and food. As I recently commented to a reader, here we are only one-and-a-half years into the economic cycle. And already we are facing an environment in tech that is akin to 1996 or 1997, in EM like 1996 or 1997 and in commodities like 2007 or 2008. That is worrying.
As for the rest of the Shilling interview, he takes the more dour 2% growth side as a foil for Byron Wien’s 5% US GDP growth call. His view is that the secular deleveraging which began during the recession is likely to continue in some fashion and be a check on US GDP growth. My view is more skewed to growth. Households do not deleverage to a significant degree when asset prices are rising. Nor do they deleverage unless financial distress or the prospect of financial distress causes them to do so. I think Shilling’s secular view is right but I believe that it will be manifest in a more chaotic fashion – little or no deleveraging, perhaps even re-leveraging during the up-phase, followed by extreme deleveraging during economic downturns. My expectation, then is for much more volatility and that invariably means aggressive policy responses.
Despite the fact that I am cautiously optimistic for 2011, my longer-term view is still very much in tact. In October 2009, I wrote The recession is over but the depression has just begun, saying:
- all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
- As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation…
- From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
In my mind, this is how it is playing out right now, with commodity price inflation rising and the technology sector in particular displaying nice levels of growth in earnings and valuations. The wild cards are the ones I presented in my 2011 forecast.