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Gary Shilling is starting to look like the last bear standing.

The economist and Forbes columnist continues to warn of a "grand disconnect" between healthy security markets and a subdued economic reality – but an economic shock will send investors in flight from risky investments as a global recession ensues.

That brutally brief summary of his latest monthly 80-page economic research and investment strategy letter stands in contrast to some of the warmer-and-fuzzier thoughts from some of his bearish peers.

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David Rosenberg, chief economist and strategist at Gluskin Sheff, seems happier to talk about the opportunities in today's economic environment – resources, the loonie, Canadian stocks and defensive U.S. stocks – than warn about approaching storms.

And even John Hussman, of Hussman Funds, said in his latest weekly letter to clients that he is "looking eagerly, though not impatiently, for bullish opportunities" – marking a subtle shift from the intractable bearish tone of earlier letters.

By contrast, Mr. Shilling's bearishness is alive and well, supported by his view that the "grand disconnect" is unsustainable because the world is so distorted right now: Economic growth is subdued while central banks are using highly experimental monetary policies and massive government deficits are limiting other stimulus efforts.

"It's unlikely that [the grand disconnect] will be closed by a leap in global economies to meet investor expectations, so a nose-dive in stocks, low-quality debt, etc. is likely, precipitated by a shock."

That shock could be caused by a hard economic landing in China, a jump in oil prices, the failure of a major European bank or a U.S. recession.

And while we reported on Tuesday that Bank of America strategists are expecting a great rotation out of bonds and into stocks this year, Mr. Shilling is sticking to his 31-year-old call on U.S. Treasury bonds as one of the best investment plays, regardless of whether or not an economic shock arrives. That's because he sees the looming threat of deflation, a Fed determined to reduce long-term interest rates and their reputation as a haven investment.

He predicts the yield on the 30-year bond will fall to 2 per cent from its current level of less than 3.1 per cent, producing a fantastic total return. He expects the yield on the 10-year bond to fall to 1 per cent from less than 1.9 per cent right now, also producing a healthy total return.

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"Of course, there is that slim, remote, inconsequential, trivial probability that our forecast of global deleveraging, of continuing global economic weakness and of recession is dead wrong, and that all the government stimuli and other forces will revive economies enough to justify current investor enthusiasm," he said. "We doubt it, however, as a review of the current state of worldwide economic affairs suggests."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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