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Gary Shilling: Recession Will Last Into 2021

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While some economists are forecasting a rebound in the second half of the year, Gary Shilling expects the current recession will continue throughout this year and into the next.

Coincidentally, Fed Chairman Jerome Powell recently said almost the same thing when he told 60 Minutes that “a full recovery “ could stretch through the end of next year; we really don’t know.”

No one does know when the U.S. economy will recover from the depths of this recession, which has thrown more than 40 million people out of work, nor how strong the rebound will be because no one knows when the COVID-19 pandemic will end or when more efficacious treatments and, most important, an effective vaccine will be available.

Even as states, cities and towns end their lockdowns, allowing businesses and schools to reopen, many people may not feel comfortable leaving their homes and restricted social bubbles. And if there is another viral wave, which many epidemiologists expect, then governments could re-institute lockdowns or other restrictions to curtail the spread  and once again the economy will slow.

Shilling, an economist and money manager, correctly forecast the 1973-1974 and 2007-2008 recessions as well as the one we’re experiencing now.

“We continue to forecast an “L” recession with economic collapse in the first half of 2020 followed by further declining quarters,” writes Shilling in his latest monthly Insight report. “This recession will probably stretch into 2021.”

Stock & Bond Markets See Opposing Economic Scenarios

In the meantime Shilling, who founded investment advisor A. Gary Shilling & Co., notes that stock and Treasury markets are trading on opposing forecasts for the U.S. economy. Stock traders seem to expect a rapid economic recovery; the Treasury market points to continued economic weakness and “lower inflation, if not deflation,” writes Shilling.

The S&P 500 has recovered 34% from its March 23 low, and Friday’s close of 3,044 was down just 5.8% year to date. The iShares 7-10 7-10 Year Treasury Bond ETF (IEF), in contrast, has gained over 11% year to date due to falling Treasury yields that pushed up prices. The long-term Barclays 20+ Yr Treasury Bond ETF (TLT) has gained 21% year to date.

Treasuries have rallied not only because the economy has slipped into recession but because deflation is looming, according to Shilling. 

“Although we’ve been expecting deflation for some time, only with the corona crisis has the trigger been pulled,” writes Shilling. 

Shilling explains that general deflation “is caused by overall supply of goods and services exceeding demand for these products” but can be more a matter of one or the other. “Global supply has mushroomed with globalization spurring output but much of the income resulting from that production is being saved, therefore curtailing demand.”

He expects the current crisis will probably continue to depress demand and promote high savings rates in the West and increase output in Asia.

Given this forecast, Shilling continues to recommend that investors buy long Treasury bonds, short commodities and stocks and hold cash. He has canceled his previous suggestion to short junk bonds because of the Fed’s lending facility, which puts a floor under junk bond prices.

To those who oppose long-term Treasuries on the ground that yields are too low to provide income and can’t fall much further to provide capital appreciation, Shilling notes that “Treasury bonds are attractive regardless of the current yield, as long as it’s declining.” A one percentage decline in the 30-year Treasury yield from 2% to 1% boosts prices by almost 20%, says Shilling, who owns bonds strictly for potential price gains rather than income.

Despite the decline in 30-year Treasury yield to 1.41% from 2.39% at year-end 2019, Shilling says yields could fall further, pushing up Treasury prices. He also notes that a nominal 1% yield with 2% chronic deflation translates into a 3% real yield and is “probably competitive with future subdued equity returns.”

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