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Gary Shilling: 4 Reasons Wall Street Is Wrong on Inflation

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What You Need to Know

  • Americans will continue to save their stimulus money and pay down debt.
  • Wages are not rising sharply, and increasing commodity prices are temporary.
  • The increase in Treasury debt will be absorbed by investors and offset by an increase in consumer saving.

Economist and investment advisor Gary Shilling isn’t worried about rising inflation despite growing reflation concerns on Wall Street and the roughly 65% increase in 10-year Treasury note yields since early January.

“There is no question the consensus is that there will be inflation, but what causes it?” asked Shilling. “I continue to believe the fundamental cause of inflation is demand exceeding supply and that is clearly not the case today.”

Shilling, co-founder of A. Gary Shilling & Co. and a longtime bond market bull, expounded on his relatively dovish view of inflation as he challenged the multiple reasons that many Wall Streeters cite for their inflation fears.

1. People Won’t Spend All Their Stimulus Money

To date, most American households have or will soon have received more than $6,000 in economic relief checks from the federal government — $2,400 from the CARES Act, passed in March 2020, $1,200 from the economic relief of December 2020 and $2,800 from the American Rescue Plan.

That’s led many strategists and analysts on Wall Street to expect Americans will spend much of those funds following a year when they spent very little because of the coronavirus pandemic, leaving consumers with a surplus of pent-up demand to satisfy.

Shilling doesn’t buy that outlook and cites instead a report from the Federal Reserve Bank of New York that showed Americans on average using about 70% of their CARES Act relief checks to save or pay down debt and the Federal Reserve Board report from 2019 finding that 12% of adults would not be able to cover a $400 emergency.

“All the layoffs have really scared people into saving,” Shilling said. Many also have lots of debt, together with fear of job losses creating “a lot of incentive to save and pay off debt. He noted the U.S. savings rate jumped to 20.5% in January.

Shilling concedes that consumer spending will increase as the economy opens up but he doesn’t expect the “huge burst” of spending that many expect. Many workers will also be spending less because they will continue to work at home, Shilling said. They won’t be spending on commuting, eating out lunches or buying work attire. “We will see continued saving, not wild spending.”

2. Wage Inflation Isn’t a Problem

Shilling isn’t worried about wage inflation, which he says hasn’t existed since globalization began a dominant force in the world economy three decades ago. He also cited the failure of Democrats to increase the minimum wage and the decline in the labor force participation rate, which was 61.4% in February, the lowest level in at least 20 years, excluding April and May 2020, near the start of the pandemic. “People are in no rush to leave home and look for jobs,” Shilling said.

3. Commodities Inflation Is Temporary

Commodity prices periodically peak during stressful times like war and product embargoes, like the oil embargo in the 1970s, but the price increase historically doesn’t last, Shilling said.

He isn’t concerned about the recent spike of U.S. crude oil prices above $66 a barrel, citing the International Energy Agency report that global oil demand will peak in 2030 and the fact that the U.S. is nearly self-sufficient in petroleum supplies.

4. U.S. Debt Levels Are Not Problematic

“Right now the Federal Reserve is buying a lot of Treasurys, which raises legitimate concerns about monetizing the debt,” but “there‘s no indication that all this borrowing will lead to a lack of willingness for investors to hold Treasurys,” Shilling said.

He expects the Federal Reserve will at some point cut back on its purchases of Treasurys and mortgage-backed securities but not until the economy shows more strength, which is what Fed Chairman Jerome Powell has said repeatedly, most recently at in his press conference after the Fed’s policymaking meeting in mid-March.

“We’ve said that we would continue asset purchases at this pace, until we see substantial further progress. And that’s actual progress, not forecast progress,” Powell said in response to a media question.

Less than a week later, in testimony before the House Financial Services Committee on Tuesday, Powell admitted as he also has in the past that he expects “inflation will move up over the course of this year” as the economy recovers, but “the effect on inflation will be neither particularly large nor persistent.”

“If I’m right and people continue to save most of their stimulus funds, all that does is shift money from the government to growing consumer surpluses,” Shilling said. “The increase in Treasury debt will be offset by an increase in consumer savings, to buy assets, including Treasurys, and pay off debt.”

Shilling wouldn’t forecast his outlook for interest rates but said they could rise up to a point that investors will find attractive. As he has for years, Shilling recommends that investors hold long-term Treasury debt. He also recommends shorting tech stocks and heavy holdings of cash.

Asked about what he’s waiting for to put his large cash allocation to work, Shilling said he’s “waiting to see if we get a blowup in the stock market.”

That could happen again to stocks that are attracting heavy speculative buying, like special-purpose acquisition companies and like GameStop and AMC did in late January. Those two stocks have since fallen sharply from their highs, though they remain well above their prices at the start of the year.

Shilling sees “inflation in those kinds of areas, not in spending for goods and services, which is a good reason there could be a major bear market in stocks.”

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