Economist Gary Shilling, a long-time market bear, believes cash and higher quality bonds are among the best investments now, but that nearly everything else — including most stocks — are poised for an inevitable drop.
In an interview with The Globe and Mail, Shilling aired his persistent concern that investors are ignoring the fact that global economies are posting negligible growth and are being propped up by “money being shoveled out the door by central banks.”
“I think for a conservative investor right now, cash is not a bad option,” he said.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
“There still is some inflation in the economies of the world, but not much. So cash is not eroding due to inflation the way it was way back in the 1970s.”
Shilling estimated it will take another five years for the global economy to deleverage from the excess debt driven up by world’s financial institutions.
In the meantime, he predicted U.S. corporate growth would be hindered by lack of economic expansion, a stronger U.S. dollar that will erode foreign profits and a lack of cost-cutting productivity-boosting opportunities.
“It’s a very unsubstantiated grand disconnect, and I think sooner or later it will be eliminated by some big shock,” Shilling said of the stock market’s recent rise.
“I don’t know the timing of that, but it could be like a big spike in oil prices because of problems in the Middle East. It could be Washington not dealing with the postponed fiscal cliff.”
Shilling told The Globe and Mail he is avoiding junk bonds, but that higher quality debt is attractive. “I’m favorably disposed to high-quality corporate bonds, and we use corporate bond [exchange-traded funds] in portfolios that we manage.”
He also likes Treasury bonds, and believes their prices are headed higher as their yields are headed lower.
“I’m of the opinion that if we’re right and there’s a global recession shaping up, that will reduce demand for credit, and it will enhance the appeal of Treasurys as a safe haven.”
Shilling predicted that real estate is still headed for further declines, despite a recent uptick in prices.
“I’m not going to quibble about the numbers, but it will take a 21 percent decline in median single family house prices in the U.S. to bring them back to a long-term trend that goes back to 1890,” he said.
Shilling earlier this month said that while the U.S. completes its five-year cycle of de-leveraging, average gross domestic product growth will be 2 percent, considerably lower than the 3.3 percent needed to keep the unemployment rate steady, according to Business Insider.
Shilling has been calling for a large fall in equity prices since at least last April, ValueWalk reported. In an interview then with Bloomberg TV, Shilling forecast a drop of 43 percent in the Standard & Poor’s 500 for 2012. The S&P 500 actually rose 13 percent last year.
“This doesn’t mean that he’s necessarily wrong, but it certainly means that his timing was off by quite a bit. If you keep predicting recession, you will be right once every three to five years. You can always claim that your timing is off,” ValueWalk reported.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
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