Shilling Sounds the Alarm: Investors, Load Up on Cash

The investment advisor and economist is worried about the continuing gap between market prices and global economic fundamentals

Gary Shilling says market prices don’t make sense in the current “topsy-turvy world.” Gary Shilling says market prices don’t make sense in the current “topsy-turvy world.”

Investment advisor and economist Gary Shilling is worried about the global economy and financial markets. In his latest monthly Insights report, the founder and president of A. Gary Shilling & Co., recommends that investors keep “extremely high holdings of cash in portfolios.”

Shilling won’t get any more specific than that but “extremely high” is even more dramatic than the “unusually-large cash positions” he was recommending in September when the Dow was 3% higher and the 10-year Treasury yield was two basis points lower than they are today. In other words, those two markets were performing better then than now even though the global economy was experiencing the same pressures, according to Shilling, but he was less worried then.

(Related: 4 Events That Could Disrupt Global Markets in Q4: Russell Investments)

Shilling tells ThinkAdvisor that market prices, for the most part, don’t make sense in the current “topsy-turvy world” where global growth is weak, central banks are impotent and political turmoil persists. “Stock prices are still high, commodities prices haven’t collapsed despite growing realization that OPEC will not be cutting production significantly…I like to invest when markets are confirming what I think is the fundamental reality.”

Only the dollar’s movements makes sense lately, says Shilling, noting that it has sold off.

Shilling is cutting back on positions across the board, raising cash and shorting commodities, emerging market stocks and bonds, U.S. stocks and junk bonds. At the same time he’s maintaining long positions in long-term (30-year) Treasuries and the dollar versus the Euro and versus the currencies of developing economies, including those tightly tied to commodities – positions he’s been holding for quite a while.

But he seems more worried now, recommending even higher levels of cash holdings because the “current turmoil may be the prelude to major market disruptions in the meanwhile.”

Shilling explains in his outlook that “the investment climate has been extremely frustrating in recent months … since it is so divorced from what we see as the basic economic and financial realities.

“Global economic growth remains sluggish and Brexit is likely to weaken Britain and Europe. Massive excess industrial capacity and labor persist worldwide, and deflation is widespread. Zero and negative central bank interest rates as well as quantitative easing have failed to rekindle economic growth. But they have spawned severe distortions as investors refuse to accept low returns and move far out on the risk curve in search of higher yields.”

At the same time voters in around the globe, unsettled by continuing stalled economies and “over a decade of declining purchasing power” are frustrated, “mad as hell” and “turning to political fringes on the left and right in despair as they reject mainstream politicians,” writes Shilling.

He says a Donald Trump victory for president coupled with a Republican Congress could be “robust for the U.S. dollar” because of the threat of protectionism. If the U.S. doesn’t buy the surplus good and services of other nations, their economies would suffer more than the U.S. economy and their currencies would decline against the dollar, explains Shilling. “When you have a surplus of goods and services … the buyer has the power, not the seller.”

But he adds that a Republican sweep in the U.S. election could lead to a worldwide recession.

A Hillary Clinton victory for the White House coupled with a Republican House -- and maybe a Republican Senate – would also not bode well for the U.S. economy, says Shilling. The gridlock that could follow “is not a particularly good situation,” says Shilling, because it could also continue the lack of income growth that has led voters in the U.S. to political extremes, says Shilling.

He's hoping that no matter who wins the White House and Congress that massive fiscal stimulus will follow. Both presidential candidates have endorsed the idea but only Clinton has offered a specific plan – investing $275 billion over five years, including $25 billion to help create a National Infrastructure Bank – that would be paid in part by increasing business taxes.

Trump has said he would invest “at least double” what Clinton has proposed and would finance the plan by borrowing several hundred billion dollars. But that could be difficult since he's also proposed big tax cuts that the conservative Tax Foundation has said would reduce revenues by $4.4 trillion to $5.9 trillion over 10 years.

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