Gary Shilling: Recession Will Last into 2021
But stocks, unlike Treasuries, are trading as if it won’t, according to the economist and investment adviser.
While some economists are forecasting a rebound in the second half of the year, Gary Shilling expects the current recession will continue throughout this year and into the next.
Coincidentally, Fed Chairman Jerome Powell recently said almost the same thing when he told 60 Minutes that “a full recovery could stretch through the end of next year; we really don’t know.”
No one does know when the U.S. economy will recover from the depths of this recession, which has thrown more than 40 million people out of work, nor how strong the rebound will be, because no one knows when the Covid-19 pandemic will end or when more efficacious treatments and, most important, an effective vaccine will be available.
Even as states, cities, and towns end their lockdowns, allowing businesses and schools to reopen, many people may not feel comfortable leaving their homes and restricted social bubbles. If there is another viral wave, which many epidemiologists expect, then governments could reinstitute lockdowns or other restrictions to curtail the spread, and the economy would slow once again.
Shilling, an economist and money manager, correctly forecast the 1973–1974 and 2007–2008 recessions, as well as the one we’re experiencing now.
“We continue to forecast an ‘L’ recession with economic collapse in the first half of 2020 followed by further declining quarters,” writes Shilling in his latest monthly Insight report. “This recession will probably stretch into 2021.”
Stock and Bond Markets See Opposing Economic Scenarios
In the meantime, Shilling, who founded investment advisor A. Gary Shilling & Co., notes that stock and Treasuries markets are trading on opposing forecasts for the U.S. economy. Stock traders seem to expect a rapid economic recovery; the Treasuries market points to continued economic weakness and “lower inflation, if not deflation,” writes Shilling.
The S&P 500 has recovered 34 percent from its March 23 low, and Friday’s close of 3,044 was down just 5.8 percent year to date. The iShares 7-10 Year Treasury Bond ETF (IEF), in contrast, has gained over 11 percent year to date due to falling Treasury yields that pushed up prices. The long-term Barclays 20+ Yr Treasury Bond ETF (TLT) has gained 21 percent year to date.
Treasuries have rallied not only because the economy has slipped into recession but because deflation is looming, according to Shilling.
“Although we’ve been expecting deflation for some time, only with the corona crisis has the trigger been pulled,” writes Shilling.
Shilling explains that general deflation “is caused by overall supply of goods and services exceeding demand for these products” but can be more a matter of one or the other. “Global supply has mushroomed with globalization spurring output, but much of the income resulting from that production is being saved, therefore curtailing demand.”
He expects the current crisis will probably continue to depress demand and promote high savings rates in the West and increase output in Asia.
Given this forecast, Shilling continues to recommend that investors buy long Treasury bonds, short commodities, and stocks, and that they hold cash. He has canceled his previous suggestion to short junk bonds because of the Fed’s lending facility, which puts a floor under junk bond prices.
To those who oppose long-term Treasuries on the grounds that yields are too low to provide income and can’t fall much further to provide capital appreciation, Shilling notes that “Treasury bonds are attractive regardless of the current yield, as long as it’s declining.” A 1 percentage point decline in the 30-year Treasury yield, from 2 percent to 1 percent, boosts prices by almost 20 percent, says Shilling, who owns bonds strictly for potential price gains rather than income.
Despite the decline in the 30-year Treasuries yield to 1.41 percent, from 2.39 percent at year-end 2019, Shilling says yields could fall further, pushing up Treasury bond prices. He also notes that a nominal 1 percent yield with 2 percent chronic deflation translates into a 3 percent real yield and is “probably competitive with future subdued equity returns.”
From: ThinkAdvisor