The Boom Is Coming, and Sooner Than You Think – BloombergView 07-18-14

Salient to Investors:

Gary Shilling writes:

  • Persistently slow growth will NOT be the norm for years to come. When private-sector deleveraging is completed, real GDP growth will return to its long-run trend of 3.5 percent or more.
  • Productivity will return to 2.5 percent annual growth or more after deleveraging is completed, in 4 years or so. Productivity was higher in the 1930s than in the 1920s, driven by the new technologies from the 1920s.
  • Labor-force growth will return and the decline in the labor-force participation rate will slow when normal economic growth resumes.
  • High government debt does not depress GDP, as Reinhart-Rogoff contend, but rather the reverse – slow growth causes deficits and debt levels to rise. Rapid economic growth pushes down the federal debt-to-GDP ratio directly as the denominator rises. The debt-to-GDP ratio will fall significantly, as it did from 122 percent in 1946 to 43 percent in 1966, and in the late 60s and 70s, and in the 90s.
  • Slow economic growth, as from 2000 to 2012, pushes up the debt-to-GDP ratio directly.
  • The 800-pound gorilla in the room – Social Security and Medicare outlays for retiring baby boomers – will be solved by Washington when there is no other choice.
  • Technology – the Internet, biotech, semiconductors, wireless, robotics and 3-D printers – is in its infancy, and rivals the engines of the American industrial revolution and railroads in the late 1800s, and autos, electric appliances and radio in the 20th century. Only a third of the world’s population is connected to the Internet but 90 percent live within range of a cellular network.

Read the full article at http://www.bloombergview.com/articles/2014-07-18/the-boom-is-coming-and-sooner-than-you-think

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Slow-Growth Forecasts Are Wrong – BloombergView 07-16-14

Salient to Investors:

Gary Shilling writes:

  • The pessimistic economic theories are wrong.
  • Weak growth will NOT last forever despite the Reinhart-Rogoff findings that the economy contracts at a 0.1 percent annual rate when government debt exceeds 90 percent of GDP.
  • In the late 1970s and early 1980s many economists presumed high inflation would last forever, yet we got disinflation by the mid 1980s. The post-war baby boom raised fears of a population explosion, yet was followed by the post-war baby bust.
  • Many experts believed that the aggressive monetary stimulus after the 2000 stock market collapse that appeared to have stabilized the economy meant that central bankers had overcome the business cycle, yet they caused the  2007-2009 recession.
  • Glenn Hubbard at Columbia Business School and Tim Kane at the Hudson Institute believe great powers fall into the trap of denying the internal nature of stagnation, centralizing power and rob the future to overspend on the present.
  • Larry Summers worries about persistently slow growth due to slow labor-force expansion and muted productivity growth.
  • Niall Ferguson at the Hoover Institution believes encroaching government is strangling private initiative, especially in the US, and threatens representative government, the free market, the rule of law and civil society.
  • Robert Gordon at Northwestern University believes that all the big growth-driving technologies have been fully exploited and that the era of 2 percent annual output growth per capita from 1891 to 2007 is over and that 1 percent annual growth and personal incomes growing at 0.5 percent annually is ahead.
  • Jonathan Laing wrote in Barron’s that the growth in the US labor force in coming decades will slow due to low birth rates and less immigration – both global trends – as will productivity advances. Laing believes any productivity increase will come from machines replacing middle-income employees.
  • Increased government regulation does stifle innovation and reduce efficiency and, therefore, growth. By 2018, the percent of Americans received meaningful financial support from the government will rise to 67% versus 28.7% in 1950, 52.4 percent in 1970 and 58.2 percent in 2007. Yet the fact that the 50 percent level was breached 43 years ago attests to the American character of deep-seated self-sufficiency.

 

Read the full article at http://www.bloombergview.com/articles/2014-07-16/slow-growth-forecasts-are-wrong

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Love Yourself Some Treasuries – Bloomberg 12-13-13

Salient to Investors:

Gary Shilling at A. Gary Shilling writes:

  • The Fed usually starts raising the federal funds rate before economic expansions are very old but this time will wait until the wave of de-leveraging, and the related slow growth, has ended. De-leveraging after major financial crises usually takes a decade to complete, so this one has 4 or 5 years to go.
  • Continuing annual growth in real GDP of 2 percent compares with a rate of 3.4 percent since WWII through 2007.
  • Treasury yields are more likely to go down than up because persistent slow growth, gridlock in Washington, business uncertainty, and ample supplies of capacity and labor on a global scale mean the US employment situation will remain weak.
  • The Fed’s unemployment rate target of 6.5 percent is becoming less meaningful because the decline in joblessness has been primarily the result of a falling labor participation rate, not rising employment. Excluding the participation rate, the unemployment rate would be 13 percent.
  • Deflation is only being forestalled by huge fiscal and monetary stimulus, but the stimulus has been replaced by fiscal drag, resulting in the shrinking federal deficit. Fed tapering won’t tighten credit by reducing excess bank reserves.
  • With inflation close to zero, it won’t take much to rattle the economy.
  • The gap between investors’ focus on Fed largesse and their lack of interest in slow economic performance is unsustainable. There has been a close correlation between the rising S&P 500 Index and the expanding balance sheet of the Fed since it started flooding the economy with money in August 2008. Expect a shock to end the Grand Disconnect and perhaps push the economy into recession.
  • Corporate profits may not hold up in the face of persistently slow sales growth, lack of pricing power and increasing difficulty in raising profit margins.
  • A substantial drop in stock prices will benefit Treasuries as they are the ultimate haven.
  • The S&P 500 corrected for inflation remains in a secular bear market that started in 2000. The PE ratio on the S&P 500 is 34 percent above its average of 16.5 going back to 1881, and has been consistently above trend in the last two decades, so probably will be below 16.5 for years to come.
  • Profits are at a record high as a share of national income as US businesses cut labor and other costs, but further productivity growth is no longer easy to achieve. Neither capital nor labor has the upper hand indefinitely in a democracy, and compensation’s share of national income has been compressed while profit’s share has leaped.
  • Corporate earnings are vulnerable to the probable strengthening of the dollar, which would reduce the value of exports and foreign earnings by US multinationals.
  • Expect further declines in Treasury yields as this bond rally of a lifetime will end but not yet.

Read the full article at http://www.bloomberg.com/news/2013-12-13/love-yourself-some-treasuries.html

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Why Only the Foolhardy Scorn Treasuries – Bloomberg 12-10-13

Salient to Investors:

Gary Shilling writes:

  • In May, when the Fed first started talking about tapering, 10-yr yields jumped to 2.72 percent in early July from 1.64 percent on May 1 and 30-yr yields to 3.68 percent from 2.83 percent.
  • Most investors hate Treasuries because they believe that serious inflation and rising yields are inevitable, and because they do not understand them despite their unquestioned quality as investments – since the early ’80s, a 25-yr zero-coupon Treasury, rolled into another 25-yr bond to maintain the maturity, beat the S&P 500 on a total return basis by 5.3 times, despite the stock rally from 1982 to 2000.
  • Stock prices are much more difficult to assess because they depend on the business cycle, conditions in a particular industry, legislation, the quality of company management, M&A possibilities, corporate accounting, pricing power and products.
  • It was only individual investors’ extreme distaste for stocks after the 2009 rout that precipitated the rush into bond mutual funds that year. Brokers dislike recommending Treasuries because commissions are low, and can be avoid ed entirely by buying directly from the Treasury.
  • Investment bankers did not like me to be on client visits if my forecast was for lower interest rates because projections of higher rates would encourage corporate clients to issue bonds immediately instead of waiting for lower financing costs.
  • Managers of bond funds do not rejoice over bond appreciation when yields fall because  they worry about reinvesting their interest coupons and maturing bonds at lower yields.
  • I never buy Treasuries for their yield but for their appreciation. The 30-yr bond increases 19.7 percent, the 10-yr increases 8.6 percent, for each 1 percent drop in yield, but the losses are bigger on longer maturities if rates rise.
  • I prefer Treasury coupon and zero-coupon bonds because of their enormous liquidity, mostly their non-callability, unlike corporates and munis, and their status as the best-quality issues in the world.

Read the full article at http://www.bloomberg.com/news/2013-12-12/why-only-the-foolhardy-scorn-treasuries.html

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Why Tight U.S. Labor Markets Are Here to Stay – Bloomberg 07-23-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

The outlook for the labor market remains bleak. Older Americans are holding onto jobs longer, limiting openings for newcomers, and employers are extending working hours and paying overtime rather than hiring.

In June 2013, almost 11 million people collected disability benefits versus 3 million in 1970, while disability benefits are higher now relative to wages. Many states try to shift people off the welfare and Medicaid rolls, which is their responsibility, toward disability, which is the fed’s.

The percentage of the population on welfare rose to 4.7 percent in 1990 from 1.4 percent in 1950, then fell overnight to 2.1 percent in 2000 due to workfare.

With government benefits, many people are financially better off at home than looking for a job or working for low wages, given commuting costs, child-care outlays, and other job and job-hunting expenses.

It takes 3.2 percent real GDP growth just to keep the unemployment rate steady: so at the current growth of 2 percent, the unemployment rate would rise more than 1 percent a year. The current low unemployment rate relative to the historical expectation appears to be the result of the decline in the labor participation rate.

Many of the 2 million people who have left the labor force in the past two decades for non-demographic reasons will probably never re-enter. Putting people back to work is not simply a matter of creating more aggregate demand; there are meaningful structural problems.

Read the full article at  http://www.bloomberg.com/news/2013-07-22/how-demographics-hold-back-u-s-job-creation.html

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Why Tight U.S. Labor Markets Are Here to Stay

How Demographics Hold Back U.S. Job Creation – Bloomberg 07-22-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

The total labor-force participation rates tend was 63.5 percent in June 2013 versus 67.4 percent in early 2000.

The participation rates of 16-to 24-year-olds has declined sharply since 2000 as slow economic growth, limited jobs and rising unemployment rates have encouraged them to stay in school or otherwise stay out of the labor force.

Participation rates for 65 to 75-year-olds and for 75 and older have risen since the late 1990s because they have been forced to work longer than planned as many were devastated by the declines in stocks from  2000-to-2002 and from 2007 to 2009 – 2 of only 5 drops of more than 40 percent in the S&P 500 Index since 1900. And the collapse of over 30 percent in house prices wiped out the equity that many had counted on for retirement – 20 percent of home mortgages remain under water.

Increasing life spans mean many older people are able to work longer, curtailing job opportunities for younger people.

In the 1880s, 78 percent of men 65 and older worked; in 1990, that figure was 16.3 percent and in 2010 it was 22.1 percent. When Social Security was enacted in 1937, the life expectancy for American men was 65, the required age for drawing benefits. Today, life expectancy is 76.3 for men and 81.1 years for women, but the required age has risen to only 67.

The US ranks 17th in life expectancy among developed countries, including wealthier, college-educated Americans. The primary reason is the high mortality of men under 50 because of accidents and violence. Women’s life expectancy gains have fallen behind those of other rich countries. Americans who live past 75 have higher life expectancy than people in many other similar countries.

The effect of an aging population is a serious concern for all developed countries, but most significantly for Japan, whose people live longest and where there is no immigration.

The US, Canada and Australia are relatively open to immigrants, and because they tend to be younger, they help support retirees. The ratio of working-age people to retirees is dropping in all G-7 countries – by 2040 to 1.5 in Japan, to below 2 in Europe, to 2.9 in the US, and 2.5 in Canada.

The labor-force participation rates for older age groups will continue to increase as baby boomers are forced to reconcile their low retirement savings with increased life spans and rising medical costs. Social Security and Medicare will provide less of a safety net as Congress is forced to deal with rising entitlement costs.

From February 2000 to June 2013, demographics accounted for 2.5 percent of the 4 percent  decline in the overall participation rate from 67.4 percent to 63.5 percent. 1.6 percent of the decline was due to non-demographic reasons by young and middle-aged people.

Half of recent graduates are working in jobs that don’t require a college education. Surveys show that the income of those who are unemployed or underemployed in the first few years after graduation never catch up with those who immediately found well-paid positions.

Read the full article at  http://www.bloomberg.com/news/2013-07-22/how-demographics-hold-back-u-s-job-creation.html

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Why Fed Has Failed to Lower U.S. Unemployment – Bloomberg 07-21-13

Salient to Investors:

A. Gary Shilling writes:

  • The Fed has yet to achieve its dual mandate of price stability and full employment.
  • QE had been tried by the Bank of Japan for years without notable success, but Western central banks have become increasingly desperate as they look for ways to create jobs.
  • Central banks can only  raise or lower short-term interest rates, and buy or sell securities – a long way from creating more jobs.
  • There have been virtually no follow-on effects from the Fed’s creation of member bank reserves. Since August 2008, the multiplier has been only $1.5, and excess reserves now exceed $1.9 trillion.
  • If real annual GDP growth averages 3.5 percent in the years ahead and productivity growth averages the 2.5 percent of the past decade, employment would increase 1 percent a year, or 1.44 million jobs at current levels. But the pool of 14.5 million available workers plus the annual increase in the working-age population of 2.2 million annually exceed the 1.44 million new jobs.
  • In the last 3 decades, many manufacturing and similar jobs have moved to Asia, so a greater share of Americans now holds service and technical jobs that tend to suffer longer stretches of unemployment.
  • Cost-cutting has been the route to pushing profit margins to all-time highs and thus employees have suffered both limited job growth and declining real wages.
  • The BLS reports that its monthly jobs total can vary by plus or minus 90,000.

Read the full article at  http://www.bloomberg.com/news/2013-07-21/why-fed-has-failed-to-lower-u-s-unemployment.html

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Gary Shilling position update 2013 – Gary Shilling blog 07-15-13

Salient to Investors:

Gary Shilling writes:

  • The fog remains thick, so reducing long positions in Treasury bonds and Japanese stocks and cut yen shorts, euro shorts and dollar long positions.
  • Maintaining long positions in US defensive stocks like utilities and health care.
  • Increased short position in junk bonds and initiated shorts in emerging market stocks and bonds.

Read the full article at  http://garyshilling.blogspot.com/2013/07/gary-shilling-position-update-2013.html

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Did Bernanke Signal Return of Risk-Off Market? – Bloomberg 06-27-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co. writes:

Short stocks and commodities, go long the dollar and Treasuries – if stocks continue to decline, the safety of Treasuries and investment-grade bonds will outweigh concerns about the end of QE.

World economies are growing slowly at best and hold no interest for equity investors, whose entire focus has been on QE.

Investors are facing two shocks: the end of QE and a hard landing in China.

China’s growth is slowed by huge excess capacity and declining numbers of labor force entrants. Official growth data are vastly overstated. and is closer to the 5 percent to 6 percent hard-landing level. China’s total domestic credit from banks et al was 207 percent of GDP in 2012 versus 145 percent in 2008, with much of the increase coming from shadow banking. Short-term interest rates rose to 25 percent last week.

Ultralow interest rates have pushed investors into the highest-yielding assets they could find, regardless of risk, including junk bonds, leveraged loans that finance private-equity buyouts, developing country bonds, investor-owned single-family rentals, and high-dividend stocks such as utilities and consumer staples.

Investors are dumping emerging-market assets and junk bonds. High dividend stocks which outperformed in Q1 underperformed in the recent sell-off. Pension funds have moved into private equity, developing-country stocks and bonds, hedge funds and even commodities.

The average closed-end bond fund has fallen 10.7 percent in the past month versus a 3.4 percent decline in open-end bond funds.

Developed country stocks have much further to drop. The sluggish US economic recovery has produced minimal sales volume growth and no increased pricing power as inflation rates fell to zero, resulting in companies cutting costs, pushing corporate profits’ share of national income to an all-time high.

Robert Shiller’s cyclically adjusted P/E indicates the S&P 500 is 30 percent above its long-term trend.

Slower Chinese growth in manufacturing undermines the rationale for the commodity bubble of the early 2000s. Higher interest rates are eliminating the incentive to store crude oil for sale in the futures market at higher prices.

Gold buyers who thought QE would promote instant hyperinflation are finding instead inflation rates dropping to zero and higher interest carrying costs.

The dollar should continue to gain as a haven, especially as protection from the euro. The strong dollar makes many commodities more expensive for businesses that operate in weakening currencies.

The yen will continue to drop against the dollar as Abe tries to turn deflation into 2 percent annual inflation and force the BoJ to double its purchases of securities.

Commodity currencies such as the Australian dollar, the Brazilian real and the Russian ruble remain vulnerable as exports and prices continue to fall.

Currency devaluations in Japan and elsewhere will be matched by competitive devaluations worldwide. No country wins in competitive devaluations as foreign trade is disrupted. In the end, most will end up devaluing against the US dollar.

Read the full article at  http://www.bloomberg.com/news/2013-06-27/did-bernanke-signal-return-of-risk-off-market-a-gary-s.html

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The Five Ways Deflation Has Already Taken Hold – Bloomberg 03-26-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co. says 5 of the 7 varieties of deflation are present in the US economy.

  • Commodity price deflation will continue as oversupply continues to swamp demand amid weak global growth and a hard landing in China, which remains export-driven. The slow global growth of the last 6 years will persist, and US consumers will continue to retrench.
  • Wage-Price deflation. Wages are being cut due to excess capacity in the labor market, weak job growth and high unemployment.
  • Financial-Asset Deflation. Stocks will decline when investors realize that weakness in global economies can’t be offset by huge injections of liquidity by central banks. Speculation, especially in new tech stocks, simply switched after the 2000-2002 collapse from stocks to commodities, currencies, emerging-market equities and debt, hedge funds, private equity and, especially, housing. Financial institutions that greatly leveraged their balance sheets over the past three decades are now being forced to raise capital, while reducing risk and leverage.
  • Tangible-Asset Deflation. Inflation and deflation have occurred repeatedly in commercial real estate since World War II. The house-price deflation of the past 6 years is the first since the early 1900s and will continue because of the 1.7 million excess housing units in the US, over and above normal inventory working levels – before the housing collapse started, housing starts and completions averaged 1.5 million per year.
  • Foreign Currency Deflation. The dollar is reasserting its traditional role as a haven in a weak, and possibly recessionary, global economy.
  • Standard Deflation. Inflation is highly unlikely today as commodity prices collapse, high unemployment persists and deleveraging suppresses private demand. Persistent excess supply and weak demand for goods and services will cause the CPI and the producer-price index to fall 2 percent to 3 percent per year.
  • Inflation by Fiat will continue as government regulation and involvement in the economy are certain following the financial collapse, Wall Street’s dishonesty, and the worst recession since the 1930s.

Read the full article at http://www.bloomberg.com/news/2013-03-26/the-five-ways-deflation-has-already-taken-hold.html

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