Shilling believes that as we head into the final quarter, increasing assets allocated to bonds is the best plan of action. “I think the economy is starting to slip. It’s really related to the weakness in housing and my forecast is that by early next year, we can see a recession unfolding,” he says. “At the same time, we’re probably looking forward to a weaker economy, lower inflation, and Federal Reserve easing, all of which work to the advantage of bonds.”
Shilling favors long Treasury bonds, since other bonds, particularly junk bonds, are more expensive. Shilling also sees the housing bubble about to break. “Buyers have retreated to the sidelines,” he says. “It’s only a matter of time before sellers have to lower their prices.”–Kara P. Stapleton