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Portfolio > Economy & Markets > Stocks

Gary Shilling: Trump Sowing Uncertainty Stokes Recession

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President Donald Trump, with his strategy of creating uncertainty, is helping to bring about a U.S. recession that likely began early this year and is an “odds-on bet” to deepen, Gary Shilling tells ThinkAdvisor in an interview.

(Related: Gary Shilling: The Recession May Have Already Begun)

The ace bubble-detector, who accurately called the 1960 and 1991 recessions, is president of A. Gary Shilling & Co., an economic consultancy and investment advisory in Short Hills, New Jersey.

Uncertainty impedes spending and investing, Shilling notes; and, he adds, recession makes the re-election of incumbent presidents tough. Indeed, a plunging stock market would “kill [Trump’s] chances of re-election,” he argues.

As for investors, they’re so focused on what the Federal Reserve does or doesn’t do that they don’t fully realize the implications of weakening corporate earnings and forecasted year-over-year declines of at least 5%.

Though Shilling continues to urge caution on stocks, he remains bullish as ever on bonds.

ThinkAdvisor held a phone interview Tuesday with the former physicist and longtime apiarist. Similar to analyzing the U.S. economy, keeping 100 beehives requires precision and vigilance. What do bees and the economy have in common right now? Not too much: Now that the summer heat has hit, Shilling’s bees are happily aloft collecting nectar; the economy, on the other hand, is headed on a downward trip, he insists.

Here are highlights of our conversation:

THINKADVISOR: How deep a recession do you predict?

GARY SHILLING: An average recession. I don’t see a big financial crisis like the subprime mortgage collapse, the dot-com blowup or the 1973-1975 recession, which was the second deepest since the 1930s. But this one would probably be a substantial decline from Christmas Eve 2018, when the market declined almost 20% from its peak in early October.

Are President Trump’s chaotic White House and his other challenges a cause of the recession that you perceive?

Those are contributing to a recession. Uncertainty seems to be his strategy. It seems he wants to keep everybody off balance. We see that particularly in the trade area. It holds back spending and investing. And, of course, there’s the prospect of an all-out trade war with China. The issue isn’t [just] a trade imbalance. It’s got a lot to do with China’s hopes of becoming an even more powerful country than the U.S. Trump realizes that the way they’re trying to do that is by using Western technology, and he doesn’t want to see that happen.

But you’re saying that a recession has probably started.

Yes, and for incumbents in Congress or in the White House to get re-elected in the midst of a recession, or even early in the aftermath, is very difficult.

Still, uncertainty isn’t good for the stock market, right?

It isn’t. But, apparently, Trump isn’t yet concerned enough that the stock market is going to sink and kill his chances of re-election next year.

Please discuss corporate earnings’ role in your recession scenario.

They’re already weakening, as you know. The earnings’ estimates are for declines of 5% year over year. But that’s from Wall Street analysts who are paid to be bullish. So you can well imagine that earnings are going to be weaker than that. But this hasn’t hit home yet.

What do you mean?

Investors are preoccupied with the Fed. People think if the Fed eases, it’s a wonderful world.


Because the Fed fueled the long bull stock market. Investors are therefore conditioned to believe that the Fed is the only game in town, and you don’t give a damn [about other indicators]. Why is the Fed talking about cutting rates? Because they’re worried about the economy. But people don’t see that. They just say, “Oh, the Fed cuts rates, and everything is dandy.”

What’s your forecast, then, for interest rates?

We’re looking at lower inflation, which is very favorable to Treasuries. So I think we’re going to see distinctly lower rates for Treasuries and investment-grade corporate [bonds]. We’re headed for 1% on the 10-year Treasury and 2% on the 30-year within a year. A recession makes Treasuries a safe haven, and it means that credit demand elsewhere dries up. We’ve had a wholesale rush of individual investors into Treasuries.

What are the main indicators telling you that a recession has likely already begun?

You’re getting a host of indicators that, while they don’t guarantee a recession, when you put them on top of the Fed’s earlier tightening, probably makes it an odds-on bet. [They include] weakness in housing; decline in industrial production; the New York Fed’s recession indicator now up to 30, which is the level that past recessions have started; declines in durable goods orders and capital spending. Also, surveys show that jobs aren’t as plentiful as they were.

If you’d written your July Insight analysis after the Labor Department issued its favorable June employment report last Friday, instead of before, would you still have said that a recession is probably underway?

Yes. You can make a case that the economy peaked back in late winter or early spring. There are so many indicators we’ve been talking about in recent months that are pointing to recession. June [jobs number] was a rebound from the very low number in May; but March, April and May were revised down, after January and February were revised up. Downward revisions are very strong indicators of weakness.

Did the June employment report show any weak areas?

One of the few was retail. The number 1 reason is that consumer spending is slowing: People had been reducing their saving rate to fund their spending. But starting about two quarters ago, they certainly shifted gears by apparently deciding they’ve had enough debt and didn’t have the funds to continue heavy spending. So the saving rate has picked up. But they were living on borrowed time because when spending is growing faster than income, that cannot continue indefinitely. Secondly, [the retail number was weak] because of the Amazon [online purchasing] effect.

Investors seem to be quite fearful and worried about the stock market now.

They should be. It’s very expensive.

How should they proceed to invest?

Do what they’re doing: Be very cautious on stocks. The portfolios we manage don’t have many equities. You need an anchor to windward: so we’re invested in defensive stocks — consumer staples, utilities, health care.

And of course you own Treasury bonds. What’s your strategy?

They still make sense. People say, “Oh, the yield is low.” But I’ve never, never, never bought Treasuries for a yield. I couldn’t care less what the yield is as long as it’s going down. I buy them for the same reason most people buy stocks: appreciation.

Do you continue to have a big cash position?

Yes, but not as large as it was because we’ve increased our Treasury position, particularly; and we’re also long the dollar. The dollar is a safe haven.

Can anything be done now to avoid the recession that you see from deepening?

At this point, I don’t think so.

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