Photo: A Gary Shilling & Co.
Economist Gary Shilling says the only possibility for the next decade is massive deleveraging from the global credit bubble.That’s why America is headed for deflation, even as the Fed increases the money supply, Shilling writes in a new book, The Age Of Deleveraging.
As corporations and households pay down debt, US corporations will be plagued with slow growth. The rest of the world will get dragged down too, as no emerging market can pick up the slack from the US consumer.
There’s a lot for investors to watch out for. Shilling names some of the biggest bombs.
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. Credit card companies, like Visa (V), and various financial firms will pay the price.
Home prices are dropping (Shilling predicts a 20% drop). 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).
Collectibles are another casualty of deflation. That Rembrant could be worth less in a few years.
Home prices aren't done crashing. When they do, banks will suffer from a wave of foreclosures. The financial system will be revived after the crisis with new profit-crushing regulations.
Mortgage heavyweight Bank of America faces the biggest liability.
Shilling also names Goldman Sachs as a potential target for CDO suits.
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.
US industrial production has stalled and won't need many machine tools and parts. Besides, these products are made a lot cheaper abroad.
Demand isn't increasing as the US economy stalls. Moreover, loans made in the bubble come due in 2012, threatening a wave of foreclosures that will crater demand.
Slow global growth means there won't be much supply pressure for oil and other commodities. Meanwhile, deflation will bring down prices.
Emerging markets aren't there yet, Shilling says, and won't be able to pick up the slack from a languishing U.S. For overheating markets like China, this will lead to a sudden crash.
Shilling predicted the Japanese crash in 1988, and he says the slow-motion train wreck isn't over yet. Bad demographics and lack of export growth are just now making their pretense felt.