The Age of Deleveraging (Shilling)

In summarizing his economic viewpoints, Shilling argues that we shouldn’t be worried about inflation, but rather focus on adapting to a period of slow growth, worrying about deflation. As consumers and businesses continue to deleverage, the economy will be facing excess capacity, putting a downward pressure on prices as Americans save more and cut back on discretionary big tickets items.

Despite commodities, such as inflation-hedge gold soaring, Shilling argues that we need to keep the big picture in mind and worry about deflationary expectations as growth will be significantly hindered. As consumers spend less, and purchase generic items, putting behind brand name goods, producers will be forced to cut costs and margins. The economist adds that we need to convince people that we are a different type of environment now, and may not see the glories of the 1980s and 1990s again. Rather, Americans should focus on the new reality, and adapt to the deflationary changes where the once middle class is now arguably a lower class.

In terms of investments, Shilling argues that the 30-year Treasury bonds are his favorite, where he predicts yields to go down further to 3% from the current 4.25%, providing an investor a healthy double digit appreciation. Lastly, he forecasts that stocks will grow slowly as nominal GDP will experience slow growth. Rather, investors may see dividend yields to be favored, as banks may eventually start increasing their dividend yields once the fiasco with the government terminates.

9 minute video interview here

via Gary Shilling: We’re in an Age of Deleveraging — Seeking Alpha.

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