Shilling still sees 2012 U.S. recession

Expert Gary Schilling is predicting another recession later this year. He is one of the best known bearish market prognosticators and does not believe the recent data suggesting stronger growth. He also suggests that the US will enter a period of deflation.

Martin Mittelstaedt
Posted on Tuesday, April 3, 2012 3:30PM EDT
The Globe and Mail

Bearish money manager Gary Shilling is sticking with his call that the United States will experience a recession later this year.

Mr. Shilling, one of the best known of the bearish market prognosticators in the U.S. and head of his eponymously named firm, A. Gary Shilling & Co., remains unmoved by recent data suggesting stronger growth and improved labour market conditions.

In his most recent note to clients, Mr. Shilling said his forecast for a mild recession, made in December, remains intact, even though it seems at odds with much of the recent exuberance for equities, which have reached multi-year highs.

"Despite the recent euphoria of investors over U.S. stocks, we believe the economy is likely to weaken as the year progresses, led by renewed consumer retrenchment," Mr. Shilling says.

Mr. Shilling's thoughts are worth noting because he's made a number of contrarian investment forecasts that, with hindsight, have turned out to be brilliant calls, among them in the early 1980s correctly forecasting that inflation was peaking and bonds were the place to be.

He has currently made another outside of the mainstream prediction, that the U.S. economy is likely to soon enter a period of deflation, or falling consumer price levels. In such an environment, super safe, long term U.S. Treasury bonds would be the best investment going, and they're Mr. Shilling's favourite place to park money.

Mr. Shilling points to a numer of unusual indicators that suggest the U.S. economy may be weaker than is commonly believed. Electricity generation is falling rapidly. While this may reflect the mild winter, it could be pointing to declining economic activity.

Meanwhile, U.S. rail shipments and the number of containers coming into the ports of Los Angeles and Long Beach, the main entry point for Asian trade in the United States, are both declining.

GDP growth has been accelerating recently, but Mr. Shilling says much of the increase in economic output has been due to rising inventories, also not a good sign.

"Either we're dead wrong on the outlook or investors are ignoring reality as they emphasize risk on trades," Mr. Shilling says.

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