Gary Shilling’s Predictions, Buys, and Sells for 2011

Gary Shilling’s Predictions, Buys, and Sells for 2011

Gary Shilling weighed in with his recommendations for 2011 in John Mauldin’s latest Outside the Box newsletter. Since the early 2000’s, Shilling has been one of very few financial commentators staunchly in the deflation camp – and his 2011 picks reflect his belief that deflation, not inflation, will rule the years ahead.

We look for slow U.S. economic growth of 2% or less this year. The post-recession inventory bounce is over. Consumers are probably more interested in saving and repaying debt than in spending. State and local government spending and payrolls are falling. Excess capacity will retard capital equipment spending while low rents curtail commercial real estate construction. Economic growth abroad is unlikely to kindle a major export boom. Housing is overburdened with excess inventories. QE2 will be no more effective than QE1 in spurring lending and economic growth, while net fiscal stimuli will decline $100 billion in 2011 compared with 2010.

With slow growth, only a moderate shock will initiate a recession. Candidates 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 environment, here are our 18 investment strategies for 2011.

1. Buy Treasury Bonds. We’re deliberately listing this strategy first not because of nostalgia, although this strategy has worked for us for 29 years on balance, and has been our most profitable investment. Instead, it’s because we expect further substantial appreciation with 30-year Treasury bonds, and because so few other investors believe our forecast has any chance of being realized. Fundamentally, we favor Treasury bonds…

—Because we foresee slow economic growth at best in coming quarters and years
—Because the Fed is determined to further reduce interest rates
—Because deflation is looming
—Because long Treasury bonds are attractive to pension funds and life insurers that want to match their long-term liabilities
with similar maturity assets
—Because as the U.S. moves ever closer to the slow growth and deflation of Japan, the parallel trends in government bond
yields seem likely to persist
—Because Treasurys are the safe haven in a sea of trouble in the Eurozone and elsewhere
—Because China’s attempts to cool her economy will probably precipitate a hard landing
—Because the likely price appreciation in Treasurys is in stark contrast to expensive stocks and overblown and vulnerable
commodities, foreign currencies, junk securities and emerging market stocks and bonds. We continue to predict that 30-year Treasurys, “the Long Bond,” will rally from its current yield of about 4.4% to 3% with appreciation of around 2.6%. Similarly, a 30-year zero-coupon Treasury would gain 48%. We also expect the 10-year Treasury note yield to drop from the present 3.3% level to 2.0%. but the appreciation would be only 11%, largely because of its shorter maturity.

Read the rest of Gary Shilling’s 2011 investment strategies here.