GARY SHILLING: 2012 Is Going To Be Totally Crappy

Gary Shilling

Photo: Bloomberg

Economist Gary Shilling sees a difficult year ahead for the U.S. and other global economies, and today he is out with his thematic outlook for 2012.HisĀ report (h/t PragCap), which closely tracks his predictions made in 2011, runs the gamut and paints another bleak picture.

Mixed in his predictions are calls for housing prices to decline another 20% and for the heathcare industry to experience “explosive growth.”

Treasury Bonds Are Still Attractive

The first theme on the list, chosen deliberately, is for treasury bonds. Shilling says it has been his most profitable investment over the last 30 years, and that won't change. Specifically he believes treasuries will benefit from slow economic growth, low long term interest rates set by the Fed and because the instrument is a safe haven from the crisis in Europe.

Source: Gary Shilling

High-Quality Income-Producing Securities Continue to be Attractive

Equities are unlikely to provide meaningful returns, making fixed income products an opportune investment. First, companies that can finance routine dividends show investors that earnings are real -- cash flow generation needs to at least cover those checks. Second, companies issuing dividends are generally more prudent and with less volatility.

Source: Gary Shilling

Small Luxuries Remain Attractive

Consumers, even in hard times, tend to splurge on some kind of luxury -- even at a lower price point. Companies have in turn adapted product lines with lower priced goods to attract that entry level purchaser. Other retailers have taken the approach of continual product refreshes, like Apple and its iPhone line up.

Source: Gary Shilling

Consumer Staples and Foods May Be Attractive Relative to the Stock Market

Consumer staples are set for another strong year, after the S&P index covering the sector gained 14% in 2011. Goods like detergent, pasta and toothpaste are essentials that consumers buy during both good and bad times. That said, downgrades are likely to continue -- pushing companies to lower margin items. The move will likely benefit discount stores.

Source: Gary Shilling

The Dollar Should Continue to Appreciate, Especially Against the Euro But Also Against Commodity Currencies Like the Australian and Canadian Dollars as Well as the Mexican Peso

With the dollar expected to remain the primary reserve currency in the long run, the U.S. currency will appreciate against a basket of others, including the Euro.

Source: Gary Shilling

Selected Healthcare Providers and Medical Office Buildings Remain Attractive

'Two major features of the current system almost guarantee explosive growth,' Shilling writes. First, employer- and government-paid health insurance allows for nearly unlimited usage. Second, many providers have incentives to perform a greater number of procedures to enhance income and avoid litigation.

Source: Gary Shilling

Rental Apartments Are Still Attractive

This year expect further gains in rental apartment prices and attached securities. As Americans begin to better pair themselves with a home with a home they can afford, rentals will benefit.

Source: Gary Shilling

Productivity Enhancers Remain Attractive

With companies continue to cut back head count, they will need to harness technology to boost or maintain performance. At the same time, layoffs can only go far before productivity gains must be reached through other means.

Source: Gary Shilling

We Still favour North American Energy

Shilling favours conventional North American energy producers as green production continues to hiccup. Older power businesses are less reliable on government subsidy. At the same time, the U.S. needs a growing power supply.

Source: Gary Shilling

Major Country Stock Markets Appear Unfavorable in 2012

Major stock markets, including those in developed Europe and China, will face a difficult 2012 when recession rears up. Economic contraction will push equities lower in those markets. Shilling remains bearish, noting these difficulties will culminate 'in a turndown in global economic activity accompanied by financial crises of unknown depth.

Source: Gary Shilling

Home Builders and Related Companies Remain Unattractive

Excessive inventory will continue to plague home prices, hampering the abilities of home builders to dig their way out. Mortgage securitization has dropped precipitously, and that will not change in the near term.

Source: Gary Shilling

If You Plan to Sell Your House, Second Home or Investment Houses Any Time Soon, Do So Yesterday

Home prices will continue to fall another 20%, following a 33% nationwide. No region is immune from market difficulties, even as inventories look lower on improvements. In reality, home sellers are taking properties off the market as they wait for the market to revive.

Source: Gary Shilling

Many Big-Ticket Consumer Discretionary Companies Remain Unfavorable

Saving rates have slowly crept up, meaning consumers can either continue to hold that cash, or begin spending. Shilling believes it will be the former, and that major purchases of high-end consumer products, resort spending and autos will be impacted.

Source: Gary Shilling

Consumer Lenders Still Look Unattractive

Consumer lenders will have a difficult 2012 as users shift further to debit usage. Stories of people with a $20,000 incomes in debt for $50,000 in purchases have run rampant, and will come to bite the industry when they must take writedowns. Add the reduction to interchange rates, and lenders won't have the same luck.

Source: Gary Shilling

Banks Remain Unattractive

Big banks are being forced to sell-off debt and close risky, and recently unprofitable, business lines. Increased capital requirements would add to those woes. Regional banks also see a year of difficulty ahead as they compete head on with supers like J.P. Morgan Chase, Citi and Bank of America.

Source: Gary Shilling

Junk Securities Remain Vulnerable

Yields on junk debt began a rapid ascent following the European crisis in 2011. Those costs have slowly declined, but with a view that defaults will increase, junk rated securities will be extremely vulnerable to slow-growth and possible deflation.

Source: Gary Shilling

Emerging Country Bonds Are Unattractive

Following investments in junk bonds, investors have moved to emerging markets with a 'zeal for yield.' However, when buying local currency denominated bonds, many investors set themselves up for inflation movements and subsequent losses. Shilling expects bond traders will move back to the market they know: the U.S.

Source: Gary Shilling

Emerging Country Stocks Remain Vulnerable

Many emerging markets, which were championed for their economic expansion, saw markets sell off in 2011 -- the Shanghai Composite slumped 22% for the year. Shilling expects a hard landing in China to knock the country back to lower growth rates, while rippling off to others.

Source: Gary Shilling

Commodities Will Probably Continue to Decline

Commodity prices will continue to decline in 2012 as a recession grips Europe and other markets. Shilling points to copper, which is 85% above the marginal cost of production. He sees further price drops before producers begin curtailing production. Agricultural commodities will depend largely on the weather, but are also forecast to fall.

Source: Gary Shilling

Old Tech Capital Equipment Producers Remain Unattractive

Unlike productivity enhancers, old tech capital producers products are mostly used to expand assembly lines or production plants. With suitable current production levels, and a slow construction industry, many producers have no need to grow their lines significantly.

Source: Gary Shilling

America this is what will happen in 2012

Business Insider surveyed economists at the largest research houses on Wall Street.
Click here to see what they had to say about the American economy >

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