In 2007 and 2008, top stock market commentators laughed at Gary "Gloom and Doom" Shilling. But all of the financial prognosticators, commentators and pundits filling our airwaves and email inboxes with predictions and prescriptions, none has been more prescient about the current financial crisis than Forbes' own resident economist.
As many of you know, Gary's Financial Strategy column has appeared regularly in the pages of Forbes Magazine since 1983. Back in September 2004, Shilling first wrote a column in Forbes entitled "Wall Street in Dreamland" that accurately predicted that the financial markets and the U.S. economy, which parted company in the late 1990s, would eventually rejoin causing a lot of people to lose a lot of money. He warned his readers: "Don't be one of them. Don't buy a bigger house than you need, and don't buy top stocks on margin. Buy Treasurys."
What many don't realize is that Gary had been warning his Insight newsletter subscribers as early as July 2004 about our subprime-fueled housing bubble and warning that when it burst, our entire economy would face dire consequences.
"When house prices return to earth―and price declines of 20% in the U.S. and 30% elsewhere are warranted―the effects on the global economy will be serious.... Subprime loans are probably the greatest financial problem facing the nation in the years ahead."
- Insight, July 2004.
Gary's predictions have been eerily accurate. But Gary is not merely a doom and gloom economist. He also gives his newsletter clients specific advice on how to position their portfolios.
In January 2007, for example, he laid out a 13-step roadmap for his subscribers. Among his predictions and recommendations:
1) Prediction: The housing bubble will burst.
Recommendation: AVOID homebuilders, building materials producers, mortgage and subprime lenders and related entities like Fannie Mae and Freddie Mac.
Result: Housing prices are down 25% nationwide from July 2006. Homebuilders are down 75% from their high. Fannie Mae and Freddie Mac are insolvent and getting a $200 billion federal bailout.
2) Prediction: "U.S. stock prices will fall, perhaps below the 2002 lows, in the midst of a major recession."
Recommendation: SELL Stocks.
Result: The current financial crisis wiped out over $7 trillion of stock market gains. The Dow Jones Industrial Average is at the same level it was in 1997.
3) Prediction: China will suffer a hard landing due to domestic cooling measures and U.S. recession.
Recommendation: AVOID Chinese stocks. China's Asian trading partners and their currencies and stocks will be damaged by a weak Chinese economy.
Result: China's Shanghai Composite Index is down 55% in the last 12 months.
4) Prediction: "Weakness in U.S. and China will spread globally, dragging down economies and stocks universally."
Recommendation: SELL Emerging Markets. Emerging markets have been driven by American and other offshore inflows. Capital will flee emerging markets and these export-driven economies will collapse.
Result: Morgan Stanley Capital International's Emerging Markets index is off more than 50% since the beginning of 2008.
5) Prediction: "Treasury bonds will rally."
Recommendation: BUY Treasurys. They are the world's highest-quality instrument, have huge market liquidity and can't be called, which limits appreciation as interest rates fall. They can be sold anytime with ease and don't need to be held to maturity.
Result: Yields on 10-year Treasurys fell from 5.1% in June 2007 to 2.8% recently.
6) Prediction: "The subprime slime fallout will spread."
Recommendation: SELL junk bonds. Losses from subprime slime will cause a credit crunch that will hit private equity firms hard and limit their ability to do deals. Overleveraged companies and debt-ladened mergers will suffer.
Result: Junk bond spreads over Treasurys have skyrocketed. Single b-rated junk bonds for example now yield 18%, up from 8% in mid 2007, as their prices have plummeted. Spreads over Treasurys are now 1591 basis points, versus about 321 basis points in mid 2007.
What is iconoclastic Forbes Economist Gary Shilling saying now?
Among other things, Gary is warning readers against giddy enthusiasm over the government's trillion-plus bail-out plans and he warns that there will be more bailouts ahead.
Gary is under-whelmed by the current plan and foresees at least another year of recession and dismal equity markets. He contends that the lynchpin of the global economy is consumer spending, here and in places like China and India. Given the current financial and housing-related job losses and the worldwide economic fall-out, Gary says consumer spending is likely to be crippled for many months ahead.
However, Gary is not recommending that investors just curl up and hide. He is actively recommending a specific Bear market asset allocation plan that involves, among other things, buying Treasurys- even at these reduced yields! Gary also has specific recommendations for oil and other commodities.
If you would like more details on Forbes Economist Gary Shilling's predictions and a step-by-step program for profiting during the current market turmoil, please click here.
Each 20 plus page monthly issue of A. Gary Shilling's Insight includes:
In-depth analyses of current global economic, political and financial trends and how they affect the investment world.
Easy-to-understand charts, tables and other metrics dissecting economic indicators critical to making sound investment decisions.
Specific investment theme action directives like "Dividend-Paying Best Stocks" and "Dollar Plays" and "Health care Productivity Enhancers."
Gary's famous back page commentary on matters great and small, complex and mundane, serious and frivolous.
Archived monthly issues of Insight going back four years.
In addition, we will also send you
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