A year ago, Dr. Gary Shilling published the influential book The Age of Deleveraging, which followed his earlier work, Deflation (1998); and in today’s Outside the Box he updates us on his thinking.
Deleveraging of the financial and household sectors has created a terrific macroeconomic undertow since 2008, eroding growth. Gary argues (against many of the talking heads in the mainstream TV world) that the deleveraging process for both these sectors has several years to run before it returns them to the long-term trend. He notes that QE is having only temporary and limited impact, as each round of easing by the Fed has propped up stocks only until a crisis in Europe or the US undermines incipient recovery all over again.
Now, this period of prolonged economic pain is giving way to competitive devaluations, as the major powers scramble to maintain a currency edge on their competitors.
The upshot is what Gary terms the “Grand Disconnect” between sluggish global economies and surging equities, driven by never-ending monetary and fiscal stimulus; and it is, as he says, profoundly unhealthy.
In a mocking concession to his critics – and there are of course many who find Gary’s views unbearable, even as the economic avalanche proceeds down the mountain at just about the rate he has predicted – he adds the following:
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. We doubt it, however.
What is an investor to do, caught up in a not-so-slow-motion landslide like this? Gary gives us a “risk-on” list; but he emphasizes that it’s temporary, because the Grand Disconnect is unsustainable – the next significant macroeconomic shock could plunge us right into risk-off mode, and we must be nimble, lest the Grand Reconnect catch us unawares.
Note the contrast, by the way, between this week’s OTB and the one penned last week by Christian Menegatti. The fact that I can’t and won’t just lay easy answers in your lap should tell you not only something about Outside the Box but also about the necessity for heightened awareness and deepened analysis as we move into this crucial year.
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One curious note. I am neither a market timer nor the son of a market timer, but I know a lot of these guys. And many whom I pay attention to are flashing major warning signals this week. If I were long this market, I would lay in hedges on what I did not want to sell and put in tight stops on the rest. Maybe a correction will be a rest stop on the way to higher numbers. Short term, emotions can drive markets to what, in retrospect a few years later, seems an obvious extreme, either to the upside or downside.
I am sitting in my office on board an American flight back to Dallas from Vegas, where I spoke to a distressed-debt group (the rather large Turnaround Management Association). As usual, I learned more than I probably imparted. Once again, distressed-debt strategies were the top-performing hedge fund style last year. Deeply contrarian, buying what no one else wants and with full knowledge of problems, these guys (and a number of ladies) are a very interesting group of people.
My good friend and partner Darrell Cain also happened to be in Las Vegas at another conference. After a marvelous dinner over which we discussed markets and our shared, lifelong love of science fiction, he took me to his favorite Las Vegas show, the Cirque du Soleil production called Love, featuring the music of the Beatles. I have been to four of the Cirque du Soleil shows and enjoy them for the high-quality entertainment they are. Darrell has been a half a dozen times to Love. It is very rare for me to repeat a movie, show, or book; so I was curious to see what could make someone want to go back again and again.
It is unlike any of the other shows I have seen. It is three-dimensional ballet that assaults your senses from the very opening moment. The music has been remastered to create one of the finest auditory experiences I have ever had. The Beatles produced a body of work broader, deeper, and more diverse than that of any other group; and it’s one that a truly impactful show could be developed around with just a fraction of their repertoire.
The show was emotionally overwhelming. It took me back to the ‘60s and my youth, telling the story of my generation by means of a visual and auditory extravaganza that simply could not be absorbed in one sitting or from one seat. While 20- and 30-somethings could appreciate the beauty, I doubt they got many of the cultural references that the artist who designed the show wove into the panorama with such effect. The Beatles were such a break with everything that went before and after.
Kind of like the credit crisis of 2008. Except that I will see Love again and hope to the gods I never see another credit crisis. It would be fun to hold an event in Vegas and go and see the show as a group.
Your all you need is love analyst,
John Mauldin, Editor
Outside the Box
2013 Investment Themes
(excerpted from the January 2013 edition of A. Gary Shilling's Insight)
The investment scene here and abroad is now dominated by the deleveraging of private economic sectors and financial institutions, the monetary and fiscal responses to the resulting slow economic growth and financial risks, and the fixation of investors on monetary ease to the exclusion of weak real economic activity.
Chart 1 sums up the deleveraging…