You could say that Gary Shilling, economist and eponymous CEO of an advisory firm, is obsessed with deflation. He’s been writing about it for over 20 years.
He correctly forecast In the early 1970s that runaway inflation was ending and in the early 2000s that a subprime mortgage bubble was growing.
Now Shilling says the slowing global economy is heading toward a period of deflation and likely recession, which will harm highly leveraged individuals and corporations, emerging market equities, commodities and multinationals.
Indeed, the Federal Reserve Bank of New York recently reported that a record 7 million Americans, many subprime borrowers, are at least 90 days late on their auto loan payments,.
“More attention should be paid to the leaps in lower quality borrowing such as subprime auto loans, peer-to-peer lending, credit card borrowing, leveraged loans, junk bonds and BBB bonds, heavily issued by energy companies and only one notch away from junk status,” writes Shilling. “The total corporate debt-to-GDP ratio has reached all-time highs and resembles the mortgage debt explosion a decade ago.”
On the flip side, those living on fixed income, homebuyers, long-term Treasuries and the U.S. dollar will benefit, according to Shilling. He says the yield on the 10-year Treasury may drop from around 2.7% to his target of 1% while the 30-year Treasury yield falls from 3% to 2%.
In his latest monthly insight report, Shilling spells out the multiple sources of deflation, most relating to long-term trends, including those below.
1. Globalization and wages. Globalization — “probably the most significant worldwide economic development in the last three decades — continues to flood the West with cheap goods from China and other low-cost Asian lands” and it will likely continue to put downward pressure on prices “unless Trump builds a sky-high tariffs wall all around America, which we doubt.”
Globalization has “decimated” manufacturing employment and high-paid union jobs in the private sectors and is responsible for a lack of real wage growth in G-7 countries for more than a decade, leading to spreading populism around the globe, says Shilling. In the U.S., he highlights far fewer jobs in utilities, oil and gas fields, delivery services and retail — the latter due in large part to the “Amazon effect.”
Shilling notes that U.S. inflation numbers don’t register the full impact of falling prices because the Bureau of Labor Statistics has not kept up with the explosion of new technology products.
2. Slowing global economy and increasing odds of a global recession. The International Monetary Fund and World Bank have both cut earlier forecasts for GDP growth this year to 3.7% and 2.9%, respectively.
Forecasters surveyed by the European Central Bank cut their forecast for eurozone growth from 1.8% to to 1.5% this year and to 1.6% next year. The German government slashed its growth forecast for this year from 1.8% to just 1% and China’s growth, which Shilling says is “overstated by her government,” is falling, to 6.4% in the fourth quarter of 2018 and to 6.6% for the full year.