Jonathan Alcorn
Some of the more notable bears are digging in their heels, er claws, amid the last batch of disappointing economic news. Take Gary Shilling, who had previously been forecasting a global recession – driven in part by a deep downturn in Europe and an economic hard-landing in China. His latest take: "Events of recent weeks have enhanced greatly the likelihood of our earlier forecast."
What has Mr. Shilling in such a tizzy? In short, GDP and jobs. U.S. economic growth in the first quarter was revised down to 1.9 per cent, at an annualized pace, down 2.2 per cent previously and 3 per cent in the fourth quarter. In May, U.S. payrolls expanded by just 69,000, which is insufficient to absorb the growing population, let alone reducing the unemployment rate. Just as bad, April and March numbers were revised downward.
"Downward revisions are normal in periods of economic decline," Mr. Shilling said in his latest note. "And warm winter weather probably inflated payroll growth in the early months of 2012, postponing the bad news. Further revisions may well reveal that the U.S. economy is already in a recession. Although, as usual, few others predict one."
Meanwhile, he points to the situation abroad as being hardly sunny. He believes European bailouts are simply papering over a deeply flawed union. And a recent decline in German manufacturing suggests that weakness abroad is overrunning its export-driven economy. In Asia, economic growth in China and India is nosediving.
Tumbling commodity prices are starting to reflect these concerns, as is the turbulence within major stock market indexes. But Mr. Shilling – we mentioned he's a bear, right? – believes there is much more carnage to come. He expects the S&P 500 to generate operating earnings of just $80 (U.S.) a share this year and trade at just 10-times earnings at its bear-market trough. When you do the math, this implies the U.S. benchmark index will fall to (yikes!) just 800 – or 43 per cent below its recent high in early April.
Hoping for central bank stimulus? Mr. Shilling argues that such quick fixes can have little long-term impact on economies that are reeling from a bigger problem: Economies and financial markets are deleveraging, as governments, companies and individuals lighten-up their debt loads – a process that could take another five to seven years to accomplish.
"The unfolding major recession in Europe, likely U.S. downturn and hard landing in China are further discrete pieces of the deleveraging process," Mr. Shilling said. "And more are likely to follow before deleveraging is completed."
He recommends staying clear of developed-market stocks, emerging-market stocks and commodities.
But he does see some opportunities, too. U.S. government bonds, where yields have farther to fall as inflation fears turn to deflation fears, should do well. Similarly, defensive stocks with high, safe and rising dividends are another source of income.
Curiously, Mr. Shilling is also keen on conventional energy producers (including natural gas), on- and off-shore drilling and Canadian oil sands. As he explains, "Natural gas prices may have bottomed, and with production rising due to leasehold requirements and desirable natural gas liquids, pipelines are attractive. New nuclear facilities may be postponed in the wake of the earthquake and tsunami in Japan. Renewable energy, including ethanol, is problematic since it depends heavily on unpredictable government subsidies amidst federal cost-cutting."
David Berman