HOBOKEN, N.J.--()--Deflation is the biggest threat to the U.S. economy, says strategist Gary Shilling of A. Gary Shilling. Through the market rally and budding economic recovery, most concluded that the crisis was over and it was time to start worrying about inflation. However, Shilling says that slow growth and a weak economy threatens to turn into deflation. “The reality that will dominate 2011 and the next decade is financial deleveraging,” as described in his new book, The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.
“The reality that will dominate 2011 and the next decade is financial deleveraging”
Gary Shilling expects U.S. economic growth of 2% or less this year, as compared to the 3.3% average of the entire post-World War II period. The likely ending of an inventory liquidation that accounted for 60% percent of real GDP growth in the five quarters through the third quarter of 2010; falling state and local government spending and payrolls, excess inventories in the housing market, and a net fiscal stimuli that is decreasing by $100 billion are factors that will hinder GDP growth. Furthermore, a recession can be initiated with only a moderate shock, such as the deepening euro crisis, a hard landing in China, and the 20% further drop in house prices Shilling expects over the next several years.
As U.S. consumers shift from a 25-year borrowing-and-spending binge to a saving spree, Shilling predicts that slow growth will spread abroad. American consumers are expected to curtail the import of goods and services many foreign nations depend on for economic growth. Furthermore, he states increased government regulation will stifle innovation and reduce efficiency while rising protectionism will slow, even eliminate global growth.
In this environment, Gary Shilling offers the following investment strategies:
Buy Treasury Bonds and Sell Developing Country Stocks and Bonds. Shilling recommends buying 30-year Treasury bonds and avoiding developing countries that depend on exports for growth.
Buy Income-Producing Securities and Sell Junk Securities. Focus on high-quality corporate bonds and stocks of utilities, consumer product companies, health care firms, and others that pay meaningful dividends that are safe and likely to rise. While junk bonds did well in 2010, slow revenue and cash flow growth will make it difficult for some firms to service their bonds.
Buy Small Luxuries and Sell Big-Ticket Consumer Discretionary Equities. Consumers, especially when they are hard-pressed as many are now, tend to buy the very best of what they can afford, even if it’s within a low-priced category, but avoid big-ticket items, such as cars and high-end consumer electronics.
Buy the U.S. Dollar, Especially Against the Euro. While the greenback isn’t necessarily a shining example of fiscal prudence and monetary integrity, Shilling argues that it is the best of bad lot and currently the only reserve currency in town. Furthermore, until early 2010, almost everyone was on the dump-the-dollar side of the boat. History suggests when that happens, the winds often shift and those folks will get tossed into the water as the boat sails in the reverse direction.
Buy Rental Apartments and Sell Homebuilders and Related Companies. Rental apartments will benefit from the separation that Americans are beginning to make between their abodes and their investments while the death of securitized mortgages, excess inventories, and stressed homeowners will likely to send homebuilder stocks down even if the stock market rises.
Sell Consumer Lenders and Medium and Smaller Banks. Since the end of 2008, revolving credit balances have fallen by $135 billion. This combined with new government regulations has pushed the credit card business from a growth industry to a laggard. Meanwhile, many medium and smaller banks are likely to fail as troubled commercial real estate loans mature in the next several years.
Sell Selected Commodities. Shilling argues that a full-blown commodity bubble has developed. A hard landing in China may well be the pin that pricks the bubble.
Buy Selected Heath Care Providers and Medical Office Buildings. Heath care is a huge sector, accounting for 16% of the GDP and growing. Shilling favors companies involved in cost containment, home health care, noninvasive diagnostic and surgical equipment, and management information systems.
Buy North American Energy. Shilling likes petroleum, natural gas, coal, the Canadian oil sands, liquefied natural gas, nuclear power, and shale gas. Renewable energy sources require heavy government subsidies that are unreliable.
Buy Productivity Enhancers and Sell Old Tech Capital Equipment Producers. Focus on firms that produce technology that reduces costs and promotes productivity while avoiding many old tech capital equipment producers.
For more information about The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, please visit http://www.wiley.com/WileyCDA/PressRelease/pressReleaseId-86757.html.