Gary Shilling is as optimistic as ever. Unfortunately, he’s one of the few people who has accurately called for deflation and continued economic woes. Thus far he’s been right and if he proves prescient we could be in for a lot more pain:
Schilling on re-affirming his call for Euro parity:
“I think this is the calm between two storms and we’re having a lot of storms. But right now there isn’t much going on in Europe. There’s the wait to see how things work out. Some of the various countries, Spain, Greece, etc. have issued bonds and have gone reasonably well and now people are focusing on the U.S. and the weakness we’re seeing in the second half double dip recession. So it’s kind of a shifting of emphasis but I don’t think the European problems have gone away by a long shot.”
On what could be a catalyst for the market to weaken the Euro:
“One thing, in terms of catalyst, is the stress test of the European banks which will be coming up at the end of this week, and they may have some unpleasant revelations. But the basic problem there is that in the Club Med south versus the Teutonic north, you have all these countries – Greece, Portugal, Spain, throw in Ireland, Italy to a certain extent – at least the southern part of Italy – which have a very non-competitive approach to their economies. In Greece you can retire at age 55. And in Spain, bullfighters can retire early because they’ve got a hazardous occupation. You’ve got a lot of nonsense there that is simply not competitive in today’s world. And of course you’ve got a lot of financial institutions in Europe which are intertwined. The French banks own $75 billion of Greek debt, public and private, and the Germans $45 billion.”
On how long before we see the Euro turn around or whether we’ll see a new low set this year:
“In our portfolios that we manage, I’ve cut way down on that. I mean when the markets go against you, you don’t just stand there and run with the freight train. But I still have a very small position short in the euro, because I think this could turn around at any time.”
On how long the Treasury rally will continue:
“I like the 30 year bond. That’s been my favorite for 29 years. And that’s now broken through 4 percent yield. I think it’s going to 3 percent. And ten year probably could get closer to 2 percent in the short end of the curve.”
On whether the possibility of a double dip recession is creating a Treasury rally:
“It’s that plus the likelihood that we’re going to see slow growth. I’m saying 2% real GDP growth annually for the next decade and deflation….I’ve been looking for deflation and now it looks like we’re getting closer. But the point is we’re deleveraging the world. Two sectors in particular – the financial sector globally and the U.S. consumer in this country. And there was three decades of leveraging up. I think it will be a decade of leveraging down, deleveraging. That gives you slow growth, and probably deflation and lower treasury yields. The 3 percent yield on a 30 year treasury, if you’ve got 2 percent or 3 percent deflation, that’s 5 percent or 6 percent real return, which is very good.”
On deflation and whether the Fed will go back to quantitative easing:
“We saw a $1.25 trillion purchase of mortgage- related securities by the Fed, it didn’t do much. But of course what’s happening is the government is simply replacing the deleveraging in the private sector. It’s simply a tradeoff. It’s no net gain so far. Will they try more? Yes, probably. But the thrill is gone. You’ve done this once. They’ve done it massively. It just simply offsets the private sector. What will they do for an encore? Questionable.”
Source: Bloomberg TV
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.