Economist Gary Shilling doesn’t see the U.S. economy growing faster than 2% in 2011 (via Prag Cap). That’s if one of various moderate shocks don’t cause a double dip.
Potential shocks include “the deepening Eurozone crisis, a hard landing in China, and the 20% further drop in house prices we expect over the next several years. That would push underwater mortgages to 40% and hype strategic defaults while severely damaging consumer spending and the economy.”
In this deflationary environment, you’ve got to pick your investments very carefully.
Shilling expects deflation above all. That's one reason he's bullish on treasuries, even as other investors quit the trade.
Shilling predicts the 30-year treasury yield will drop from 4.4% to 3%
In a deflationary environment, dividends become very popular.
Consumers are spending less but still want status-symbol goods. Conspicuous consumption is coming in smaller packages during the recession, as the newest iPhone or iPad take over in back-to-school spending.
First, Shilling doesn't believe the inflationary, death-of-the-dollar scenario.
Second, Shilling says the dollar will remain the world's currency with no real competition. As proof, he points to developing countries that are dumping euros and buying dollars.
Health care accounts for 16% of America's GDP and growing rapidly, according to Shilling. Even Obama's health care reform ended up boosting earnings for many companies.
Shilling thinks housing is a worthless investment which the rest of America will recognise after home prices crash another 20%.
If even a small percentage of households switch to rentals there would be a huge demand for apartments.
Anything that helps juice bottom lines will do well in the new era. This includes consulting groups, temp help agencies, computers, internet, biotech and telecom.
America's import demand keeps growing. Energy investment in the region should keep up its performance, while geopolitical uncertainty in key oil exporting countries means there could be bumps in world supply.
Home prices are dropping. People are losing interest in giant McMansions. Add to that America's newfound antipathy toward debt and you've got a bear market for home builders.
You might want to avoid PulteGroup (PHM), Beazer Homes (BZH), M/I Homes (MHO), Ryland Group (RYL) and KB Home (KBH).
Schilling says that even 'location, location, location' doesn't mean you'll be safe from the national dive in housing prices.
Consumer discretionary spending is getting whacked as Americans grow debt shy. Moreover, consumers will have less money to spend.
Autos, appliances, airlines, cruise lines and leisure and hospitality providers will suffer.
America could be finally, finally kicking the credit habit. Revolving credit balances have fallen by $135 billion since the end of 2008. The number of accounts opened is falling.
Credit card companies, like Visa (V), and various financial firms will pay the price.
In a reversal from 2010, when smaller bank stocks outperformed large ones, they will drop as their commercial real estate loans get crushed.
Shilling calls this year's rally in junk bonds overblown. Slow revenue and cash flow growth will make it impossible for many firms to service debts.
Especially China. Shilling says China's economy is overheating from stimulus funds, which aren't supported by exports or consumer spending. This will lead to a sudden crash.
Slow global growth, especially in China, means there won't be much supply pressure for oil and other commodities. Meanwhile, a strong dollar will bring down prices that are part of the commodity bubble.
The rally during 2010 didn't convince Shilling, and he expects that with stalling US industrial production, there won't be demand for machine tools and parts.
Besides, these products are made a lot cheaper abroad.
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