Last year, economist A. Gary Shilling humiliated the rest of the economic forecasting industry by going 13 for 13.
As promised, here are A. Gary Shilling's predictions for this year:
Every one of our 13 investment strategies for 2008 worked last year. Some of them have been fully exploited so we dropped them from this year's list. But others are only partially achieved in view of our dire outlook that the worst global financial crisis and deepest worldwide recession since the 1930s will continue throughout 2009.
So we've retained 10 of our 2008 strategies this year, some in modified form, and added two new ones.
1. Sell homebuilder stocks and bonds.
2. If you plan to sell your house, second home or investment houses anytime soon, do so yesterday.
3. Sell some housing-related stocks.
4. Sell some consumer discretionary spending companies.
5. Sell most commercial real estate.
6. Sell some commodities.
7. Sell emerging market equities.
8. Sell emerging market debt.
9. Buy the dollar.
10. Sell stocks in general. (S&P 500 to 600)
11. Sell consumer lenders' equities.
12. Buy, carefully, high-grade bonds.
A. Gary Shilling on Financial Sense Newshour
Jim Puplava interviewed Gary Shilling in the first hour of his weekly Financial Sense Newshour program. It was Shilling's first time on the show -- and what a treat it is hearing him allowed to finish his thoughts and sentences. Much different from when he's appeared on CNBC roundtable discussions with 4 or 5 others, all talking at the same time. Some of whom aren't qualified to tie Shilling's shoelaces.
Shilling correctly forecast much of this current financial mess several years ago -- and he tells Puplava housing has further to fall. In fact, he thinks we might not see a bottom in housing until sometime in 2010.
I like listening (and seeing and reading) Shilling when the occasion arises in the same way I enjoy guys like Jim Rogers and Marc Faber on "big picture" type stuff. He's been writing columns for Forbes for what seems like forever. He strikes me a man who's been around a while and who takes a long-term view of things. Let's hope this is the first of many appearances with Puplava.
So first let's review Shilling's forecasts for 2009. He was amazingly accurate with his 2008 investment strategies. Expect the same in 2009 as he's part of a growing chorus of experts who believe "the worst global financial crisis and deepest worldwide recession since the 1930s will continue throughout 2009." His 12 strategies, with my notes:
1. Sell home-builder stocks and bonds.
2. If you plan to sell your house, second home or investment houses anytime soon, do so yesterday. (Yes, another 20% drop is coming.)
3. Sell some housing-related stocks.
4. Sell some consumer discretionary spending companies.
5. Sell most commercial real estate.
6. Sell some commodities. (But proceed "carefully:" Selling "some" securities, or buying, or actively trading in today's volatile markets demands a level of skill sets, savvy and sophistication most investors lack.)
7. Sell emerging-market equities.
8. Sell emerging-market debt.
9. Sell stocks in general. (Shilling's forecasts that corporate profits will fall 48% from their peak in the third quarter 2007 to the fourth quarter 2009, and drop 32% from 2008 to 2009. This forecast implies much weaker S&P 500 earnings than projected by Wall Street analysts and strategies.
10. Sell consumer lenders' equities.
11. Buy the dollar.
12. Buy, carefully, high-grade bonds.
No recovery in 2009? Not till 2010, or later? Shilling's not alone. But in the eyes of the Wall Street happy-talkers, he's just another dark-side bear vying for the title "Dr. Doom" in 2009.
Shilling offers 10 "sells" and two cautious "buys." The dollar's one: "The buck tends to have five-to-seven year moves, and the current one appears to have just started. With a global recession, the dollar is the safe haven, the best of the bad lot."
I spent the past weekend in Colorado (go Broncos!), and looked through my father's library at some of my old books. I grabbed a copy of Shilling's Deflation to read on the plane ride home (which is currently listed for $600 since it is out of print - hat tip to reader AC). Shilling has been spot on this year, as his recommendations at the beginning of 2008 show amazing foresight:
In the January 2008 issue of his INSIGHT newsletter, Gary Shilling outlined his 13 investment recommendations for 2008:
Sell or sell short homebuilder stocks and bonds.
If you plan to sell your home, second home or investment houses anytime soon, do so yesterday.
Sell short subprime mortgages.
Sell or sell short housing-related stocks.
Sell or sell short consumer discretionary spending companies.
Sell low-grade fixed-income securities.
Sell or avoid most commercial real estate.
Short commodities.
Sell or sell short emerging market equities.
Sell emerging country bonds.
Buy the dollar before long.
Sell or sell short U.S. stocks in general.
Buy long Treasury bonds.
A. Gary Shilling: Still a Hardcore Bear
The past week has seen a number of previously stalwart bears adopt a more bullish posture, including Doug Kass, Marc Faber, Steve Leuthold, Barry Ritholtz and Richard Suttmeier.
Gary Shilling, president of A. Gary Shilling & Co., is another member of the bearish all-stars, but he's not adopting a bullish stance, even as the market extends its two-day winning streak. Not by a long shot.
Shilling is sticking with his target of 600 for the S&P 500 and believes three key events must occur before any talk of recovery can be taken seriously:
A reduction in the huge inventory of excess homes: The official stats say there's 3.6 million inventory of unsold homes on the market but the "shadow supply" - homes likely to come on the market if demand improves or because of rising unemployment - is widely viewed to be much larger.
Stabilization in the financial sector: The crisis has now morphed from subprime to consumer credit and commercial real estate, the insurance industry and beyond.
"Real" fiscal stimulus: Shilling estimates only about $200 billion of the $787 billion stimulus package is "rock hard infrastructure" spending that might actually aid the economy in the short term. He believes a second fiscal stimulus package is coming later this year that's less of a "social agenda."
Shilling, who's predictions for 2008 proved notably prescient, also notes the fact "bottom picking" has become the national pastime suggests sentiment isn't really as negative and fearful as typically occurs at important market/economic turning points.
A. Gary Shilling's 2009 Predictions: More of the Same Pain
If you're betting the economy will recover in the second half of this year and should be buying stocks now in anticipation, economist Gary Shilling, president of A. Gary Shilling & Co., isn't your guy. A. Gary Shilling -- author of the popular INSIGHT newsletter -- says the recession will run for the duration of this year and stands by a forecast for the S&P 500 to hit 600 in 2009.
A recovery isn't likely until 2010 -- at the earliest -- says A. Gary Shilling, who is effectively doubling-down on his 2008 predictions, which proved eerily prescient.
A. Gary Shilling is bullish on the dollar and cautiously optimistic about high-grade corporate debt, but doesn't see much to be hopeful about from the long side in 2009.
Plus, click "more" to embed the new video.
Interview: A. Gary Shilling on Good and Bad Deflation
While many Americans have experienced inflation, few know much about the flip side, deflation, which refers to falling prices. Some economists now warn that the country may be entering a period of deflation that will prove harmful to the economy. A. Gary Shilling, a former chief economist at Merrill Lynch who runs an investment strategy firm in Springfield, has written two books about deflation and believes the U.S. is about to experience it. But unlike other forecasters, Shilling says deflation will prove to be beneficial.
NJBIZ: What is deflation and is it good or bad?
A. Gary Shilling: Deflation simply means that you've got more supply than demand so prices in general tend to decline. That isn't each and every price, of course. But on average, as measured by major indices, prices tend to decline. Whether it's good or bad depends on whether it's a matter of supply increasing or demand falling. Bad deflation is what you had here in the 1930s and in Japan today, which is demand deficient. Good deflation, by contrast, is what we had in the late 1890s and in the 1920s in this country, and again today. It's led by a burst of technology which gives a huge expansion in productivity and supply and you simply get the good deflation of excess supply. It isn't from a collapsing economy but a growing economy and you're just producing so much because of these new technological developments that supply overwhelms demand.
NJBIZ: Then today's economic situation is good?
A. Gary Shilling: We think it is, although since I wrote the first of the two deflation books in 1998 there are a couple of things that we've got to keep in mind. One of them is that since then we've had nothing but leveraging up in Corporate America. That's going to give us a rough transition since in deflation the real cost of debt, debt in purchasing-power terms, goes UP, which is the reverse of what happens in inflation. So few people think there's the possibility of deflation that they have this very vulnerable [debt] position. I think it's ultimately going to be good deflation but I think the transition to it is going to be rough because we've just got too much leverage.
NJBIZ: Can you elaborate on the impact of deflation on debt?
A. Gary Shilling: In deflation, selling prices weaken and incomes are generally weaker but the face amount of the debt doesn't go down. What that means in terms of people's ability to repay that debt is that the debt has gone up.
NJBIZ: Is the country experiencing deflation today?
A. Gary Shilling: It's close. If we're right, and the housing bubble breaks, the crack in housing prices is going to reveal to everybody that the emperor has no clothes. In other words, those who have faced declining stock prices for two-and-ahalf years and will soon face declining housing prices are going to say, "Hey, there really is something else going on here," and will admit to deflation.,
NJBIZ: Where should people put their money in a time of deflation?
A. Gary Shilling: I've been a big fan for more than 20 years of long Treasury bonds and I think they are still marvelous investments. They're the best credit in the world. They're not callable, which is important because as interest rates go down you don't want somebody to call away the bond so you've got to reinvest at lower interest rates. And they're for all practical purposes infinitely liquid. You don't have to worry about disturbing the market when you sell a few. If we're right, we've still got further to go, to 3% yields from 5% on 30-year Treasuries today. Let's say it happened over two years so you would have two years worth of interest and the total of appreciation and interest payments would be about 50%. So I think they still are the most attractive vehicle to be in. By the way, that's not TIPs [Treasury Inflation Protected], the inflation -indexed bonds. They're the worst. They're terrible as interest rates go down because you don't get any appreciation on them.
NJBIZ: The conventional wisdom is that deflation would hurt the economy by causing people to defer purchases in the expectation of falling prices. What is your view?
A. Gary Shilling: In my deflation books, even though I forecast good deflation, I did talk about deflationary expectations. I noted that they were exactly the reverse of inflationary expectations, which is when you have anticipation of higher prices and restrained capacity. In deflation you expect lower prices and hold off on purchases. Deflationary expectations are real and I expect them. Still, you have that in good deflation and bad deflation. It doesn't make deflation bad per se.
NJBIZ: How would deflation affect corporate profits?
A. Gary Shilling: In deflation you have no pricing power because you've got excess supply. Who can raise prices when you've got excess supply except in a few isolated cases? But again, in good deflation what happens is the productivity growth more than offsets this. You're producing so much more per unit of input-labor, capital and everything else-that even with declining prices profits improve.
NJBIZ: How should companies respond to deflation?
A. Gary Shilling: One of the things anybody needs to do in a state of deflation is promote productivity intently and control labor and other costs. For business I strongly advise paying as much from the bottom line as possible, as opposed to the top line. In other words, pay more in bonuses, profit sharing, fringes and so on. In inflation, if you overpay someone you can simply freeze their salary and inflation will reduce the real cost to the employer to the proper level. But a flat salary increases with deflation. That's very difficult, particularly if you have employees whose productivity growth doesn't justify staying even. It's easier to deal with the effects of deflation through paying from the bottom line and through fringes and so on than it is with base pay. So I continue to recommend that business address this issue and deal with this problem [since] the only alternative is to lay people off. But if you've got people paid much more in bonuses or profit sharing or whatever, pay automatically adjusts itself.
NJBIZ: Can good deflation coexist with strong growth of the economy?
A. Gary Shilling: Oh sure! In the period from 1870 to 1896, when the driving technology was the railroads crisscrossing the country and the industrial revolution was in full flower, the economy grew at a 4% annual rate in deflation-adjusted terms. That's the greatest growth we'll probably ever see for a sustained period. And yet during that period wholesale prices fell 50%.
NJBIZ: Will deflation bring better times?
A. Gary Shilling: I think so. But again, I think the transition could be on the rough side. Once that's over, expect good deflation to reign. When I came out in 1998 with that deflation book, I wasn't aware of anyone else who was talking about deflation. Since then there have been other forecasters joining our camp but I don't think any of them are looking for good deflation. They all expect the end of the world or something close to it.
Economics bottom line for Thematic.
A. Gary Shilling is an economist who puts money where his mouth is. After doing economic forecasting for brokerage firms for some 30 years, Shilling started his own firm, A. Gary Shilling & Co., now based in Springfield, N.J., and soon after launched an investment advisor, Thematic Investment
Partners, which also includes a commodity trading advisor.
Using economic forecast "themes" as a basis, Shilling and his key trader, John Trammell, determine ways to leverage those forecasts via equities and commodities markets. Futures in the portfolio mainly serve as a kicker, Trammell says.
Some kicker. For 1993 through November, the fund was up 130% for the year, with $35 million under management (total funds under management is closer to $80 million). This return follows a 1992 in which the group was up almost 27%.
Shilling says their 1993 return was not based on any one market.
"We were short oil and copper, long European bonds, short and long U.S. bonds, short the Nikkei, short Phillip Morris (and other consumer brands), short drug companies," he summarizes. "A whole host of trades went right. It's heartening it's not just one market."
The group begins its investing with A. Gary Shilling's forecast. He releases a list of "themes." For example, a few this past year were: Japanese stocks will continue to fall, reflecting massive economic and financial problems (played out); China will continue rapid growth (yes); European short interest rates will fall as recession there deepens; European bonds will rally with declining short-term rates and falling inflation (mixed).
Trammell translates these forecasts into market action.
"We backed into futures," Trammell says. "As (A. Gary Shilling) honed themes down, I found instruments (for example, futures) that fit perfectly (into our investment strategy)."
Not only will the group buy or sell gold -- depending on the outlook -- they will look at gold mining stocks the same way. That, in fact, is more their orientation.
"We start with our view of the economy, and it's really a long-term view," Shilling says. "For example, a key ingredient, and one that's been there over a decade, is we were unwinding inflation, and now we think we're going into deflation. We also look at weather, like the result of Mt. Pinatubo in the Philippines in 1991 (and how it affects agriculture around the world). We look at what's happening in health care -- which is all part of the deflation argument -- because we see cost cutting in business in general and health care in particular. So we look abroad and see lingering recession in Europe and massive restructuring in Japan. We put all these things together and ask what are logical implications of this that have investment possibilities?"
He says he plays the group's edge -- which is economic forecasting.
An Ohio native, A. Gary Shilling graduated from Amherst with a degree in physics. Deciding he didn't want to be a "researcher," he headed to Stanford for his doctorate in economics. After working four years at Standard Oil of New Jersey (now Exxon), he went to Merrill Lynch, where he set up the economics department.
"I made a strategic blunder by forecasting in 1969-1970 a recession," A. Gary Shilling recalls. "But Donald Regan (then Merrill chairman) fired me because I wasn't bullish on America (his forecast, though, was correct), so I went to a firm, White, Weld, which Merrill Lynch bought in 1978. I'm the only guy to be fired twice by Regan."
Then he started his own economic consulting firm -- and was pressured by, well, the economics of business to begin an asset management firm.
"We thought we could take our economic themes and turn them into investment vehicles," he says. "But it's tough enough to come up with these (forecasts). And I believe fervently that markets can remain irrational a lot longer than you remain solvent."
Still, they set up the trading manager, bringing in Trammell in early 1992 to head up the trading. Trammell, an economist also, came with a trading bent, too. Prior to A. Gary Shilling, he was at the brokerage firm Securities Research for six years. He also had been a primary economic research assistant to Herman Kahn, who founded Hudson Institution, a non-profit think-tank.
A third part of the group is Peter Farmer, who heads operations, and served as an intern on the bond desk of Chicago Research and Trading. He was key in designing Thematic's models.
Money management discipline has been a main reason for the group's high returns over the last two years. (Not that they were shoddy prior to 1992. They ended 1991 down 3.1%, but ended 1990 up 25%.) Trammell says they've decreased their volatility dramatically. For example, before he came, the largest drawdown -- over a seven month period -- was almost 30%. Since February 1992 the largest was a one-month hit in 1992 of almost 6%. The key is to get out of a position if it loses 1%. Also, they allocate no more than 3% of assets in individual stocks or commodities, no more than 15% in any industry, and no more than 20% to any one economic theme. And, they will get out of any position that loses 25% of realized profits. Technical analysis is used only as an entry and exit guide.
Shilling's attitude is something like those stars who seem to appear out of the blue: "We became an overnight success after 30 years (in the business)."
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