Outside the Box

Risk On, Regardless

April 9, 2014

When Gary Shilling was with us here last fall, he and I were feeling considerably more sanguine about the near-term propects for the US and global economies. In fact, I said about Gary that “that old confirmed bear is waxing positively bullish about the future prospects of the US. In doing so he mirrors my own views.”

In today’s excerpt from Gary’s quarterly INSIGHT letter, he tackles head-on the shift in sentiment and economic performance that has ensued since then. He steps us through the ebullient headlines and forecasts that dominated at year-end, and then remarks,

It’s as if an iron curtain came down between the last trading day of 2013 and January 2014. A headline in the Feb. 5, 2014 Wall Street Journal screamed, “Turnabout on Global Outlook Darkens Mood.”

Don’t get me (and Gary) wrong: many of the positive factors that he and I identified last fall are still in play; but they are longer-term, secular factors such as technological transformation and a tectonic shift in the energy landscape rather than the cyclical factors that will dominate for most of the rest of this decade.

In today’s OTB, Gary does an excellent job of summarizing and analyzing those cyclical factors. In this extended excerpt from INSIGHT, you’ll be treated to sections on investor and consumer behavior, deleveraging, housing, income polarization, unemployment, Obamacare and medical costs, the prospects for inflation, the Fed, emerging markets, and much more.

Be sure to see the close of the letter for Gary’s special offer to OTB readers.

I find myself in the lovely tropical city of Durban, South Africa. The hotel where I’m staying, The Oyster Box, is a lovely old throwback properly set on the Indian Ocean, where you can see the continual shipping traffic queuing up to get into the port, which is the largest in Africa. The hotel reminds me of the Raffles in Singapore, with a better view and somewhat more Old World charm. Or at least what I romanticize as Old World charm from movies I saw as a kid (though some of my younger readers are probably sure I lived in that era!).

I sleep now, then get up in less than five hours to catch a plane to Johannesburg, where I will spend the next three days doing more of the speeches and interviews that I’ve been doing for the last two, for my host Glacier by Sanlam. Anton Raath, the CEO, has that quintessential ability to make everyone feel welcome and keep them on goal. I am continually impressed with the quality of South African management, whether here or among the South African diaspora. If the government here could ever figure out how to get out of their way… I wrote a Thoughts from the Frontline almost exactly seven years ago that I called “Out Of Africa.” It was a very bullish take on a country that I could see had wonderful prospects. And indeed investing in South Africa would have been a good move at the time – a solid double in seven years.

But this trip I’ve seen things and talked to people that don’t give me the same feeling. We’ll talk about it this weekend, after I have more meetings with both stakeholders and analysts of the local economy. South Africa seems to me to face many of the same problems that have beset Brazil, Turkey, and others in the Fragile Six. Why is this? Why should a country with this many resources, both physical and human, be falling behind? I think some of you can guess the answer, but I will wait to tell the rest of you in this week’s letter.

Once again, for the fourth time in my life, my hot air balloon trip was canceled! Sigh. I am not sure what the travel gods are trying to tell me, but I will not give up, and one day I expect to soar above the earth on something other than my own hot air.

Have a great week.

Your wanting to come back to this hotel and pretend to be genteel for a few days analyst,

John Mauldin, Editor
Outside the Box

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Risk On, Regardless

(Excerpted from the March 2014 edition of A. Gary Shilling's INSIGHT)

U.S. stocks leaped 30% last year, continuing the rally that commenced in March 2009 and elevated the S&P 500 index 173% from its recessionary low (Chart 1). By late 2013, many investors were in a state of euphoria, even irrationally exuberant about prospects for more of the same this year and seized on any data that suggested that…

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Discuss This


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Phil Bock

April 20, 2014, 12:51 a.m.

The author appears very pessimistic in his assessment of the Affordable Care Act (Obamacare).  Consider his comment that “Obamacare will reduce working hours by the equivalent of 2.5 million jobs by 2024”.  But even if the supporting actions come to pass - people cutting back their hours to qualify for government healthcare subsidies and others dropping out of the labor market because they no longer need to work to have access to reasonably-priced healthcare insurance - that does not mean that the work they are currently doing will go away.  Instead, this represents new job opportunities for the currently unemployed and those young people and immigrants who will be new to the workforce in the years to come.  It is quite possible that few, if any, of those jobs will be lost.

Also, the overall cost of the healthcare system may or may not increase as dramatically as he projects. To begin with, the Affordable Care Act contains a number of features designed to force the healthcare industry to become more efficient. Moreover, most Americans had access to healthcare prior to the passage of this Act, albeit that for many it was through emergency rooms and clinics.  The cost of serving those who could not pay was borne by those who could, in the form of higher insurance premiums or out-of-pocket payments.  Now that insurance companies and healthcare providers will no longer have to play this cost-shifting game as much, costs for those who could pay prior to the Affordable Care Act should decrease (or at least not increase at the same rate as before).  Time will tell how all the plusses and minuses will work out, but I do not believe things will be as bleak as Mr. Shilling projects.

Ronald Nimmo

April 13, 2014, 6:42 p.m.

De-leveraging may last longer than the average period of 10 years—or 4 more years. The reason is that the incredible amount of “financial innovation” and the unprecedented social reinforcement of instant gratification has created a debt burden that I suspect is deeper than even the published figures show. The fiscal stimulus of the Federal Government a few years ago in addition to the QE and ZIRP policies of the Federal Reserve also seem likely to have slowed down de-leveraging. The inflation of asset prices due to these factors means that liquidation was inhibited. Liquidation is the most basic force for effectuating de-leveraging.

Ken Walden

April 11, 2014, 11:17 a.m.

Gary Shilling is one of my favorite financial writers/thinkers, HOWEVER, for all you Shilling/Timer fans note that in the Jan. 21, 2013 Forbes magazine, p. 54, Gary said “Throw in a bear market P/E low of ten and the S&P Index drops to 800, a 42% decline”. OOPS

Richard Arnold 71203351

April 9, 2014, 12:44 p.m.

So Mr. Shilling asserts we can’t afford the Affordable Health Care Act? Maybe he’s looking in the wrong place for the reason why?