Gary Shilling recently wrote a five-part series for Bloomberg News on the economy. His view is that GDP growth comes primarily from consumers spending from either higher income or from reduced savings and debt accumulation. In his view, the US economy exhibits the latter pattern and he therefore expects another recession. He is therefore calling for stocks to drop 43% in 2012. Wow! Shilling is also long treasuries as a result.
Below is the Bloomberg Television video and links to his articles.
P.S. – For an alternate and more bullish take on stocks, see the Kashkari view. This kind of dichotomy is what makes markets. But the extreme dichotomy, in my view, is not the result of Shilling or Kashkari being extreme outliers. Rather, it is because we are at an inflection point in this cyclical bull market. In my view, the next few months of economic data and macro policy decisions are going to be crucial.
Shilling series
- Will U.S. Avoid Recession in 2012? (Part 1)
- Will U.S. Avoid a Recession in 2012? (Part 2)
- Will U.S. Avoid a Recession in 2012? (Part 3)
- Will U.S. Avoid a Recession in 2012? (Part 4): Shilling
Bloomberg Television copy of TV interview below. Source: Bloomberg Television
Shilling on his report that the S&P will drop 43% from its recent level:
"The analysts have been cranking their numbers down. They started off north of 110 then 105. They are now 102. They are moving in my direction. I think that is true because you have foreign earnings that don’t look good because of recession unfolding in Europe, stronger dollar, so they are translation losses. A hard landing in China. In the U.S., we could see a moderate recession led by consumer retrenchment. I think that that kind of earnings estimate is not unreasonable…it’s a quartet, [I am] long treasuries, short stocks, short commodities and long the dollar."
Shilling on the U.S. economy:
"The story is that there is nothing else except consumers that can really hype the U.S. economy. Consumers have been on a mini spending spree in terms of not keeping up. Incomes have simply not kept up. Of course, the real key behind that is employment. It looked earlier like jobs were picking up and that was going to provide the income and people would spend it, so on, so forth. But the employment report that we got last week throws cold water on that. Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up."
On whether investors will come back to the U.S. market if the situation in Europe gets worse:
"Sure, we are the best of the bad lot. We’re the best horse in the glue factory. The U.S., it certainly looks better than China or Europe or certainly Japan. But, I’m not sure that that means that people go into stocks. Cash, although it does not pay anything, is an alternative. My 30-year favorite long Treasury bonds, I we’re headed for 2.5% there. They have come down from 3.2 to 3.0 recently. Of course the 10-year now has broke 2% again. I think there is still life there in terms of appreciation…I think that one and a half is possible on the 10-year."
"I think 1.5 is possible on the 10-year. I have to tell you, all the way down, when I got interested in 30-year bonds it was in 1981, the yield was 15.21. All the way down in yields, all the way up in price, everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."