Gary Shilling’s Insights Newsletter is always full of interesting market commentary. While he’s been excessively bearish on the equity market in recent years, Shilling has nailed the overall macro outlook including the weak economic outlook, bear market in housing and the debt deflation environment. His latest monthly newsletter contains some good macro investment themes for the investor who is not overly enthusiastic about the economic backdrop:
“The turmoil in the Middle East has introduced considerable volatility into security markets and threatens global oil suppliers and the worldwide economic recovery. So have the earthquake and tsunami in Japan, the prospective hard landing in China, the continuing sovereign debt crisis in the eurozone and the renewed drop in U.S. house prices. In this environment, we’re investing cautiously.
Treasury bonds (favorable) Treasurys have rallied as a safe haven in a sea of trouble. Slowing growth and looming deflation will also favor Treasurys. These are available through security brokers, banks and www.treasurydirect.gov as well as via ETFs and futures contracts. Standard & Poor’s warned of a possible downgrade of Treasurys if the deficit isn’t seriously addressed until after the 2012 election, but the market dismissed the threat promptly. After failing to call the collapses in Enron, Worldcom and subprime mortgages, rating agencies have little credibility. Inflation fears are nearly universal, but commodity inflation is unlikely to spawn a wage-price spiral given high unemployment and ample global capacity. Also, both agricultural and industrial commodity prices may have broken (see Commodities below).
Income-producing stocks (favorable) Included are utilities, drugs and telecoms with high, safe and rising dividends. Also, master limited partnerships. They can be purchased individually or through ETFs.
The dollar vs. the euro and the yen. Also the Dollar Index (favorable) The eurozone remains in deep trouble and the buck is the world’s safe haven. The international intervention against the yen on March 18 may have marked its high water mark. Implement this theme with futures contracts and ETFs on the dollar index as well as put options. With almost everyone dumping on the dollar, it may soon rally, especially against the euro.
The dollar vs. Australia dollar (favorable) Australia has become a Chinese colony as the island continent’s minerals are dug up and sent to China. And China is in the “stop” phase of her stop-go economic policy. Implement this theme with futures.
Eurodollar futures (favorable) This theme depends on the Fed continuing to keep rates flat in the face of an uncertain economy, but this is becoming less certain beyond late 2011. Big moves in eurodollar prices are small in absolute terms, so an investor needs the leverage of futures contracts to make meaningful money. Calls on the futures are also available.
Rental apartments (favorable) are gaining favor by those who can’t afford home ownership and are discouraged by falling house prices. REIT prices seem overblown, but direct ownership of rental apartments may still be attractive.
North American energy (favorable) As a nation, the U.S. has decided to reduce dependence on imported energy from high-risk areas such as Venezuela, Africa, Russia and, especially, the Middle East. We like conventional energy investments including natural gas. New nuclear facilities may be postponed in the wake of the earthquake and tsunami in Japan. Renewable energy depends heavily on unpredictable government subsidies. Implement with futures, ETFs and individual stocks.
Medical Office Buildings (favorable). The aging postwar babies, the 2010 health care law and the migration of physicians from private practice to hospital employment will promote robust, steady growth in this real estate sector. Implement with REITs and direct ownership. See “The Outlook For Health Care and Medical Office Buildings,” page 30.
Sell your house, second home or investment single-family houses yesterday, if you plan to do so any time soon (unfavorable) Excess inventories are likely to push prices down another 20%. See “Still Home Sick,” page 1.
Sell homebuilders in view of the deteriorating housing outlook. See “Still Home Sick,” page 1. Developing country stocks (unfavorable) China is likely to have a hard landing. Implement with ETFs on China related stocks.
Commodities (unfavorable) The commodity bubble may be beginning to break as others join us in thinking about a hard landing in China, falling U.S. house prices and troubles in Japan and the eurozone. Oil may be the exception with Middle East uncertainty. Implement with stocks, ETFs and futures. We’re short copper and sugar.”
Source: Gary Shilling’s Insights
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.