Gary Shilling - Why You Should Own Bonds
If you followed Gary Shilling’s advice for the last 30 years, you would be very wealthy.
Shilling runs the New Jersey-based economic consulting firm the bears his name, A. Gary Shilling & Company, and he is the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, published in 2010. He spoke last week at the Boston Security Analyst Society asset allocation conference in Boston.
Since 1981, Shilling has consistently advocated owning long-dated Treasury securities. In his talk, he reiterated that advice as one piece of his three-part asset-allocation strategy for the coming year.
In 1981, Shilling said we were “in for the bond rally of a lifetime.” Since then, a strategy of rolling a 30-year zero-coupon bond outperformed the S&P 500 by 6.3 times.
Shilling’s thesis was centered on the macro-economic theme that has underpinned his recommendations for the last 15 years: deflation. Shilling’s previous book, Deflation: How to Survive and Thrive in the Coming Wave of Deflation, was published in 1998.
Let’s look at what Shilling said is going on in the world and what he said it means for portfolios.
The global landscape
Since 1749, according to Shilling, inflation during wartime periods has averaged 5.6%, aided in part by aggressive government spending. But during peacetime, productivity growth has kept inflation low or nonexistent. Military spending is approaching a post-war low, he said, and deflation is imminent.
“We would have had it sooner,” he said, “had it not been for massive monetary and fiscal stimuli.”
Shilling said policies are heading other way: taxes have increased, higher taxes are being collected due to an improved economy and the 2009 stimulus package has worn off.
“Now we have fiscal drag, instead of fiscal stimuli,” he said.
Slow growth underlies our economic woes, Shilling explained, and it is due to continuing deleveraging following the financial crisis. It normally takes a decade for deleveraging to complete following a crisis, he said. We are eight years into it, and “it may take more than two more years.” Meanwhile, the U.S. economy is operating at a “half-speed expansion”
Meager wage growth is dampening growth, according to Shilling. Profit margins have shot up, but only through corporate cost cutting. That’s fine for businesses, he concedes, but the flip side is depressed wages and income. The bottom 90% of wage earners have paid the highest price, he said. Median real wages have been basically flat since the financial crisis, according to Shilling. Without increased consumer spending, slow growth and deflation are certain.