The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation
While many investors fear a rapid rise in inflation, author Gary Shilling, an award-winning economic forecaster, argues that the global economy is going through a long period of de-leveraging and weak growth, which makes deflation far more likely and a far greater threat to investors than inflation. Shilling explains in clear language and compelling logic why the world economy will struggle for several more years and what investors can do to protect and grow their wealth in the difficult times ahead. The investment strategies that worked for last 25 years will not work in the next 10 years. Shilling advises readers to avoid broad exposure to stocks, real estate, and commodities and to focus on high-quality bonds, high-dividend stocks, and consumer staple and food stocks.
- Written by one of today's best forecasters of economic trends-twice voted by Institutional Investor as Wall Street's top economist
- Clearly explains what to invest in, what to avoid, and how to cope with a deflationary, slow-growth economy
- Demonstrates how Shilling has been consistently right about major economic trends since he began forecasting in the early 1980s
Filled with in-depth insights and practical advice, this timely guide lays out a convincing case for why investors need to be prepared for a long period of weak growth and deflation-not inflation-and what you can do to prosper in the difficult times ahead.
Delveraging, especially of the global financial and U.S. consumer sectors, will dominate the worldwide economy for years. It's centered on five traumas so far. Three more possibilities loom.
Chapter 1 Spotting Bubbles 1
Economic and financial bubbles are time-honored and part of immutable human nature. I love to be among the few to spot them and predict their demise. They follow a welldefined pattern as they expand and burst.
Chapter 2 Making Great Calls 29
They involve important events that the consensus doesn't foresee and unfold for the stated reasons. Here are five I've made: the 1969-1970 recession, the early 1970s inventory bubble and 1973-1975 recession, disinflation starting in the early 1980s, the demise of Japan's 1980s bubble, and the dot-com blow-off in 2000.
Chapter 3 The Housing Bubble (Great Call 6) 53
Why I saw it coming in the early 2000s, how I forecast its demise and the way I personally profited.
Chapter 4 The Financial Bubble (Great Call 7) 95
The great disconnect between the financial and real worlds started three decades ago and accelerated in the 2000s. Soaring financial leverage, especially in the global financial and U.S. consumer sectors, made collapse inevitable.
Chapter 5 The Results of Denial 123
The 2007-2009 recession and financial crisis started in early 2007 with the subprime mortgage collapse, spread to Wall Street at mid-year, then moved to U.S. consumer retrenchment and global recession in late 2008. Investors thought every crisis was the last, and governments had no foresight or master plans.
Chapter 6 Slow Growth Ahead 159
Global slow growth in the next decade will result from U.S. consumer retrenchment, financial deleveraging, increased government regulation and involvement in major economies, low commodity prices and the shift by advanced lands to fiscal restraint.
Chapter 7 No Help from Anywhere 225
Four more reasons for slow global growth: Rising protectionism, continuing U.S. housing weakness, deflation and weak state and local government spending.
Chapter 8 Chronic Worldwide Deflation 273
Deflation comes in seven varieties, but is fundamentally driven by supply exceeding demand. Productivitysaturated new tech and globalization will drive the good deflation of excess supply while slow economic growth introduces the bad deflation of deficient demand. As the two combine, I look for chronic price declines of 2 to 3 percent annually.
Chapter 9 Monetary and Fiscal Excesses 311
The inflation-wary Fed will probably withdraw excess reserves if inflation looms. Federal deficits over $1 trillion will persist as weak economic growth forces government job creation and helps push those dependent on government to two-thirds of the population. Still, government stimuli will continue to only replace private sector weakness at best.
Chapter 10 The Outlook for Stocks 339
Corporate earnings grow with GDP in the long run. With slow growth and deflation in prospect as well as falling P/Es, stock appreciation will be muted and below dividend yields. History favors market timing over buy and hold, even more so in this environment.
Chapter 11 Twelve Investments to Sell or Avoid 363
Big-ticket consumer purchases, consumer lenders, conventional home builders, collectibles, banks, junk securities, flailing companies, low tech equipment producers, commercial real estate, commodities, Chinese and other developing country stock and bonds, and Japanese securities.
Chapter 12 Ten Investments to Buy 425
Treasury bonds, dividend-payers, consumer staples, small luxuries, the dollar, asset managers and advisers, factorybuilt houses and rental apartments, health care companies, productivity-enhancers and North American energy.
About the Author 493
Amid the many investors who fear a rapid rise in inflation, award-winning economic forecaster A. Gary Shilling argues that the global economy is going through a long period of deleveraging and weak growth that will make deflation a far more likely and greater threat to investors than inflation. According to Shilling, who predicts chronic price declines of 2 to 3 percent annually, “Many investors don’t seem to realize that the good life and rapid growth that started in the early 1980s was fueled by massive financial leveraging and excessive debt, first in the global financial sector and later among U.S. consumers. But now those two sectors are being forced to deleverage and, in the process, are transferring their debts to governments and central banks.”
In his new book THE AGE OF DELEVERAGING: Investment Strategies for a Decade of Slow Growth and Deflation (Wiley; November 2010; $39.95; 978-0-470-59636-4; Hardcover), Shilling explains why the United States and world economy will struggle for a number of years and what investors can do to protect and grow their wealth in the difficult times ahead.
After examining the recent housing and financial bubbles, as well as his philosophy behind forecasting and analyzing the economy and financial markets, Shilling offers his forecasts for the next 10 years, including how:
- U.S. consumer retrenchment, financial deleveraging, increased government regulation, low commodity prices, and the shift to fiscal restraint will lead to slow growth globally.
- Rising protectionism, continuing U.S. housing weakness, and weak state and local government spending will result in further stagnation.
- Federal deficits over $1 trillion will persist as weak economic growth forces government job creation and helps push those dependent on government to two-thirds of the population. Government stimuli will continue to only replace private sector weakness at best.
- With slow growth and deflation as well as falling corporate price-to-earnings ratios, stock appreciation will be muted and below dividend yields.
Shilling then describes how investors can navigate this treacherous terrain by avoiding such areas as banks, junk securities, low tech equipment producers, commercial real estate, commodities, Chinese and other developing country stock and bonds, and Japanese securities while buying treasury bonds, consumer staples, factory-built houses and rental apartments, health care companies, and North American energy.
THE AGE OF DELEVERAGING explains why investors need to be prepared for a long period of weak growth and deflation—not inflation—and what to do to prosper during this time.
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