Ever since the Fed began printing money during the financial crisis, a parade of economists have predicted that the U.S. will be hit with runaway inflation that destroys the value of cash and bonds.
As yet, those economists have been dead wrong.
One economist who has been right, meanwhile, at least about bonds, has been Gary Shilling of A. Gary Shilling & Co. Last year, Shilling startled clients by recommending bonds, on the theory that the U.S. was still struggling with de-leveraging and deflation, rather than the inflation that so many feared. Bonds then went on to be one of the best-performing asset classes of the year.
In recent weeks, bond yields have begun to rise, leading many to believe that the day of reckoning is finally at hand.
No, it isn’t says Gary Shilling.
Shilling does not think the economic recovery is gaining steam. He thinks analysts are much too optimistic about earnings for this year, and he thinks the recent resurgence in hiring is not the result of companies being optimistic about the future but because productivity gains are declining and companies need to hire to grow revenue and earnings. In contrast to those who have recently called the bottom in house prices, Shilling also thinks house prices have another 20% to fall.
In light of all this, Shilling still thinks deflation is a bigger problem than inflation. He’s looking for the 30-year Treasury yield to drop back to 2.5%