Tuesday, December 31, 2013

Deleveraging half over, ends in 2018

As we predicted over three years ago in our book The Age of Deleveraging: Investment strategies for a decade of slow growth and deflation, and in many Insights since then, economic growth of about 2% annually will probably persist until deleveraging, especially in the financial sector globally and among U.S. consumers, is completed in another four or five years.

Deleveraging after a major leveraging binge and the financial crisis that inevitably follows normally takes around a decade, and since the workdown of excess debt commenced in 2008, the process is now about half over. The power of this private sector deleveraging is shown by the fact that even with the immense fiscal stimuli earlier and ongoing massive monetary expansion, real growth has only averaged 2.3% compared to 3.4% in the post-World War II era before the 2007-2009 Great Recession.

via http://www.mauldineconomics.com/frontlinethoughts/gary-shilling-review-and-forecast

Monday, December 30, 2013

Gary Shilling December 2013 Interview

Interview with Swiss Business TV on China Hard landing, commodities, Australia and Slow Growth.

Sunday, December 29, 2013

On Fed driven rally, Earnings peak, productivity & dollar rally

The rise in stocks, which we continue to believe is driven predominantly by investor faith in the Fed, irrespective of modest economic growth at best. "Don't fight the Fed," is the stock bulls' bellow. Supporting this enthusiasm has been the rise in corporate profits, but that strength has been almost solely due to leaping profit margins. Low economic growth has severely limited sales volume growth, and the absence of inflation has virtually eliminated pricing power. So businesses have cu t labor and other costs with a vengeance as the route to bottom line growth

Wall Street analysts expect this margin leap to persist. In the third quarter, S&P 500 profit margins at 9.6% were a record high but revenues rose only 2.7% from a year earlier. In the third quarter of 2014, they see S&P 500 net income jumping 14.9% from a year earlier on sales growth of only 4.7%. But profit margins have been flat at their peak level for seven quarters. And the risks appear on the downside.

Productivity growth engendered by labor cost-cutting and other means is no longer easy to come by, as it was in 2009 and 2010. Corporate spending on plant and equipment and other productivity-enhancing investments has fallen 16% from a year ago. Also, neither capital nor labor gets the upper hand indefinitely in a democracy, and compensation's share of national income has been compressed as profit's share leaped. In addition, corporate earnings are vulnerable to the further strengthening of the dollar, which reduces the value of exports and foreign earnings by U.S. multinationals as foreign currency receipts are translated to greenbacks.

via www.mauldineconomics.com/.../gary-shilling-review-and-forecast‎

Monday, December 16, 2013

Love Yourself Some Treasuries

The Federal Reserve usually starts to raise its federal funds rate before economic expansions are very old. This time, however, any move toward higher rates will probably have to wait until the wave of deleveraging, and the related slow growth, has ended.

Continuing annual growth in real gross domestic product of about 2 percent compares with a rate of 3.4 percent in the post-World War II years through 2007, when the recession began. Under normal circumstances, deleveraging after major financial crises takes a decade to complete; this round started in 2008, and it has four or five years to go.

Meanwhile, I believe Treasury yields are more likely to go down than up. First, persistent slow growth, gridlock in Washington, business uncertainty, and ample supplies of capacity and labor on a global scale mean the U.S. employment situation will probably remain weak.

The Fed has said it wouldn’t raise its federal funds rate until the unemployment rate -- now 7 percent -- comes down to 6.5 percent. That target is becoming less meaningful, however, because the decline in joblessness has been primarily the result of a falling labor participation rate, not rising employment. If the participation rate hadn’t dropped from its February 2000 peak because of the retirement of members of the baby-boom generation, discouraged job-seekers and youths who have stayed in school during the recession, the unemployment rate now would be 13 percent. As investors increasingly grasp the Fed’s falling unemployment rate target, Treasury yields -- which have anticipated a rise in interest rates -- will probably continue to decline.

Inflation is close to zero and deflation is probably only being forestalled by huge fiscal and monetary stimulus efforts. But that stimulus has been replaced by fiscal drag, resulting in the shrinking federal deficit. In addition, the impending Fed tapering of its bond purchases won’t tighten credit by reducing excess bank reserves, but it will reduce the monthly additions to that $2.4 trillion trove.

With inflation this close to zero, it won’t take much of a hiccup to rattle the economy. And deflation is distinctly beneficial to Treasuries.

I’ve believed for some time that there is an unsustainable gap between investors’ focus on Fed largesse and their lack of interest in limping economic performance -- a state of mind I call the “Grand Disconnect.” There’s been a close correlation between the rising Standard & Poor’s 500 Index and the expanding balance sheet of the Fed since the central bank started flooding the economy with money in August 2008. 

I’ve also been expecting a shock to end the Grand Disconnect and perhaps push the sluggish economy into a recession. Will the negative effects of the October government shutdown and debt-ceiling standoff, coupled with the confusion caused by the rollout of the Patient Protection and Affordable Care Act, provide that jolt? The initial Christmas retail selling season may be telling, and the risks are on the down side. I’m also focused on corporate profit, which may not hold up in the face of persistently slow sales growth, the lack of pricing power and increasing difficulty in raising profit margins.

A substantial drop in stock prices will benefit Treasuries -- not because of the economic weakness and deflation that are likely to be generated by a bear-market-generating shock, but because investors will be drawn to the securities as the ultimate haven.

Furthermore, stocks are vulnerable. The S&P 500 recently reached an all-time high, though corrected for inflation, it remains in a secular bear market that started in 2000. This reflects the slow growth since then and the falling price-earnings ratio, and it fits in with the long-term pattern.

Sunday, December 15, 2013

Why Only the Foolhardy Scorn Treasuries

In May, when the Federal Reserve first started talking about reducing its $85 billion monthly purchases of Treasuries and mortgage-backed securities, yields jumped, to 2.72 percent in early July from 1.64 percent on May 1 for the 10-year note, and to 3.68 percent from 2.83 percent for the 30-year bond.

Yields stabilized after Fed officials took note of the panic and said any withdrawal of stimulus spending would begin only when the economy was stronger. Although central bankers vigorously denied that the tapering of bond purchases signaled an impending rise in interest rates, investors didn’t believe them.

Many interest-rate forecasters have insisted that the three-decade decline in U.S. Treasury bond yields is over, and they may be right -- finally. Yields on the 10-year note and the 30-year bond remain close to the recent highs reached two years ago. Then again, the Treasury bears have been proclaiming the end of the bond rally since rates began to decline in 1981.

In those days, few people agreed with me that inflation -- still running at more than 10 percent -- was unwinding and that interest rates would fall. The consensus called for rates to remain high or even rise indefinitely. Yet when 30-year yields peaked at 15.21 percent in October 1981, I said that inflation was on the way out and that “we’re entering the bond rally of a lifetime.” Later, I forecast a drop to a 3 percent yield. Then, too, other forecasters thought I was crazy.

Most investors have a distinct anti-Treasury bond bias, and not just because they believe that serious inflation and leaping yields are inevitable. Stockholders hate these securities because they don’t understand them. But their quality as investments has been unquestioned, at least until recently, and their prices rose promptly in 2011 after Standard & Poor’s downgraded the U.S.’s credit rating. Treasuries and the forces that move yields are well-defined: Fed policy and inflation or deflation are among the few important determinants.

Stock prices, by contrast, are much more difficult to assess. They depend on innumerable variables, including the business cycle, conditions in a particular industry, legislation, the quality of company management, merger and acquisition possibilities, corporate accounting, pricing power and products.

Stockholders do understand that Treasuries typically rally under weak economic conditions, which are negative for stock prices, and they consider declining Treasury yields to be a bad sign. It was only individual investors’ extreme distaste for stocks after the 2009 rout that precipitated the rush into bond mutual funds that year. Moreover, brokers don’t want to recommend Treasuries because commissions on them are low, and investors can avoid commissions altogether by buying them directly from the Treasury.

Those who worry more about inflation than deflation also hate bonds, which tend to fall in price as inflation increases. People who work in finance on Wall Street also disdain Treasuries. I learned this many years ago when I worked at Merrill Lynch & Co. and White, Weld & Co. Investment bankers didn’t want me to accompany them on client visits if my forecast was for lower interest rates. They wanted projections of higher rates that would encourage corporate clients to issue bonds immediately instead of waiting for lower financing costs. A similar dynamic is at work today as investors and companies anticipate Fed tightening and higher interest rates.

Managers of bond funds are sober professionals who always worry about inflation, higher yields and subsequent losses of principal in their portfolio. But if yields fall, they don’t rejoice over bond appreciation; they worry about reinvesting their interest coupons and maturing bonds at lower yields.

This negative view of bonds, especially Treasuries, persists despite their vastly superior performance compared with stocks since the early 1980s. Starting then, a 25-year zero-coupon Treasury, rolled into another 25-year bond to maintain the maturity, beat the S&P 500, on a total return basis, by 5.3 times, even after the recent substantial bond selloff. And that’s despite the stock rally from 1982 to 2000.

I’ve never bought Treasuries for their yield. I only care that it is going down. I want Treasuries for the same reason that most of today’s stockholders want equities: appreciation.

I like the 30-year long bond because maturity matters to appreciation when rates decline. Thanks to compound interest, each percentage-point decline in interest rates increases the value of a 30-year bond more than it does a shorter maturity bond. If yields drop 1 percentage point -- say, to 3 percent from 4 percent -- the gain is 8.6 percent on a 10-year note, but it is 19.7 percent on a 30-year bond. That said, the losses are bigger on longer maturities if rates rise.

I prefer Treasury coupon and zero-coupon bonds above other securities for three reasons. First, they have gigantic liquidity, with hundreds of billions of dollars trading each day, which means that only the largest investors can buy or sell without disturbing the market.

Second, in most cases, they can’t be called before maturity. Issuers of corporate and municipal debt can call their bonds at fixed prices, meaning appreciation is limited when interest rates are declining and you’d like longer maturities. Even if the bonds aren’t called, the threat that they could be often restricts their ability to rise over the call price. But when rates rise and you prefer shorter maturities, you’re stuck with the bonds until maturity.

And third, Treasuries -- despite the August 2011 S&P downgrade -- are still the best-quality issues in the world.

(Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” This is the first in a two-part series.)

Via Bloomberg.com

Monday, December 2, 2013

Gary Shilling: Dont Worry, Be Happy

Whenever an abnormal economic condition persists, theories are concocted to explain why it will last forever. And why not? The theory-spinners have very receptive audiences who enhance their credibility.

Real GDP growth in the last six years has averaged 0.8% by my estimate, anemic compared with 3.4% in the previous, post-World War II years. So, right on schedule, theories have come out of the woodwork predicting sluggish economic performance forever.

Until their data were corrected by a graduate student, Carmen Reinhart and Kenneth Rogoff convinced many that when government debt exceeds 90% of GDP (the U.S. is now almost at 100%), the economy contracts 1% annually. Columbia Business School’s Glenn Hubbard and Tim Kane see “the storm clouds of history” gathering on America’s horizon due to political inertia, antigrowth policies, eroding economic vigor and excess government spending.

Niall Ferguson, who teaches at Harvard, believes ever encroaching government is strangling private initiative and threatens representative government, free markets and the civil society. Robert J. Gordon of Northwestern thinks all the large growth-driving technologies are fully exploited and sees nothing ahead to equal the automobile, telephone, radio or jet plane. The icing was Barron’s Oct. 28 cover, which screamed: “The Snail Economy.”

Sure, the economy is five years into deleveraging–about halfway through this gauntlet. But in about four years it will probably resume normal gains, even with a catch-up bonus. Productivity-rich technologies like computing, the Internet, robotics, biotech, telecom and additive manufacturing are far from fully developed. The Industrial Revolution started in England and New England in the late 1700s. It grew like Topsy, but it was only after the Civil War that it was big enough in the U.S. to turbocharge growth and productivity.

No doubt, the Baby Boomers are aging. But their lack of retirement savings is forcing many to keep working. Unlike Europe, which historically exports people, the U.S. is a land of immigrants, legal and illegal. They will keep the labor force growing. Japan, by contrast, has the longest G-7 life expectancy, no immigration and low fertility. So it has a leaping pool of seniors to feed and a declining population. Europe will follow soon. With the one child per couple policy in China, the number of new labor-force entrants ages 15 to 24 is falling. In fact China is the only country that will get old before it gets rich.

Don’t underestimate this nation’s indomitable entrepreneurial spirit. Consider the explosion of mobile communications and social media. In Japan and parts of Europe there is cultural antipathy toward entrepreneurs.

The $400 billion annual U.S. current account deficit measures the extent to which foreigners recycle dollars to finance the federal deficit and other shortfalls. It’s dropped from an $800 billion rate before the Great Recession, and it will fall further as consumers continue their shift from a 30-year borrowing-and-spending binge to a saving spree, reducing demand for imports.

Also, the shale oil boom means the U.S. is moving toward energy independence. This will reduce our geopolitical vulnerability in the Middle East.

I expect that the dollar will reverse its long slide. My study of currencies since Roman times reveals that the buck will continue to prevail as a global reserve currency. The U.S. is the world’s largest economy, and second-place China is slowing as it shifts from being export-driven to domestically led.

We have the globe’s deepest, broadest and freest financial markets. Our greenback is involved in 87% of international currency transactions. Despite the downgrade, foreigners continue to plow money into Treasurys.

Sure, the U.S. has its problems. But dire forecasts of slow growth forever are just another case of theory built upon faulty facts.

Source: www.forbes.com/shilling

Sunday, December 1, 2013

Cautiously optimistic about US Manufacturing

The revival of the U.S. manufacturing sector has been sufficiently robust to convince many Americans that a factory renaissance is under way.

Boston Consulting Group predicted that increased exports promoted by stagnant U.S. wages and lower energy costs will result in 2.5 million to 5 million new jobs by 2020 and a reduction of the 7.3 percent unemployment rate by two to three percentage points.

I also believe manufacturing is likely to continue its expansion. However, big gains in exports and jobs are far less likely. In 2010, President Barack Obama set a goal of doubling U.S. exports in five years, but he didn’t specify which countries would buy them.

Deleveraging by global financial institutions and by U.S. consumers has been under way for five years. After past financial crises, this process of unwinding debt has taken about a decade. So despite the huge fiscal and monetary stimulus, deleveraging and the resulting slow growth of about 2 percent a year in U.S. real gross domestic product are likely to persist for another five years.

In this environment, the traditional big buyers of global exports -- the U.S. and European countries -- have muted demand for everything.

The U.S. manufacturing trade deficit remains at the high levels it reached early in this recovery. The total trade balance has deteriorated as the revival of consumer spending favored imports. Although exports are up 40 percent since 2009, they have leveled off recently and have a long way to reach the goal of doubling by 2015.

Manufacturing employment has revived, to 11.96 million in September, from a February 2010 low of 11.5 million. Still, that is a tiny increase compared with the 19.6 million peak in June 1979. Manufacturing output has picked up along with the economy, though with the sluggish recovery, it’s still below the 2007 peak.

More important, productivity, as measured by output per employee, has resumed its robust long-term 3.4 percent annual growth rate. As a result, the gains in manufacturing jobs look more like an interruption in the long-run decline than a decided upturn.

As measured by output per hour worked, manufacturing productivity has been rising at an annual rate of about 2 percent, far faster than total nonfarm productivity, which was flat in the second quarter compared with a year earlier. So, with compensation rising at about the same rate -- 1.7 percent in manufacturing year over year, and 1.6 percent for all nonfarm employment -- unit labor costs in manufacturing (the ratio of compensation growth to productivity growth) actually declined 0.4 percent year over year, though it rose 1.6 percent for the nonfarm sector as a whole.

Wage increases have been rising more slowly than the consumer price index, which means real wages are falling. The good news is that falling unit labor costs, the result of low wage increases in a high unemployment economy and significant productivity growth, are retarding manufacturing output prices along with export prices.

Nevertheless, U.S. real wages would need to drop much more than is likely in coming years to be competitive with those prevailing in China and other developing countries. China has increased minimum wages about 25 percent over the past year in the hopes of creating more consumer purchasing power as the country shifts from an economy led by now-weak exports and now-excessive infrastructure spending to a domestic demand-led economy. Also, with Chinese labor costs jumping, low-end manufacturing is shifting to lower labor-cost countries such as Bangladesh, Vietnam and Pakistan; Chinese production is moving to higher technology exports such as telecom equipment and computers.

The result is that labor-intensive products such as textiles and shoes may only account for about 15 percent of Chinese exports. Also, even if Chinese hourly compensation rose at the extremely high rate of 25 percent a year, it would still take 15 years for it to climb from the $1.15 level in 2009 to the $35.53 an hour average U.S. compensation in manufacturing in 2011.

With these labor cost differences, it’s not surprising that the U.S. share of global manufactured goods exports dropped to 11 percent in 2011 from 19 percent in 2000. Meanwhile, the European Union’s share fell to 20 percent from 22 percent, but China’s portion leaped to 21 percent from 7 percent. Today, U.S. exports to China only represent 20 percent of Chinese exports to the U.S.

Of course, global competitiveness in manufacturing isn’t only affected by labor costs. Logistics play a large role, tool. After the March 2011 earthquake and tsunami in Japan and the subsequent supply chain disruptions, many importers in North America and Europe looked for closer sources. But that interest wasn’t enough to overcome huge labor and other cost differences and cause large shifts of production to the U.S. and Europe. Instead, the disruption benefited low-cost producers, notably Mexico.

Infrastructure is another concern. Anyone who has spent three hours in traffic getting from the Sao Paolo airport to downtown has a first-hand understanding of Brazil’s deficiencies. Then there is government bureaucracy and the accompanying corruption that adds to costs in developing countries. India insists that big-box retailers such as Wal-Mart Stores Inc. must buy from local suppliers as a condition for opening stores. Wal-Mart has thrown in the towel on expansion.

China’s new leaders are trying to curb rampant corruption among Communist Party higher-ups, as exemplified by the recent trial and conviction of one-time party rising star Bo Xilai.

Nonlabor costs are important. Boston Consulting Group estimated that this year, manufacturing labor costs in China are only 13 percent of those in the U.S. but the costs of materials, parts, containers, packaging and so on are 74 percent of those in the U.S. That means total costs are 93 percent of the U.S. average. That’s up from 82 percent in 1982, when Chinese labor costs were 7 percent of compensation for U.S. manufacturing workers.

Monday, November 25, 2013

The rise of the US Dollar

Gary writes, "Internationally, money-especially today when it can be transferred anywhere in a split second-wants to be where the action is. That requires not only a powerful and large economy but also deep and broad markets in which to invest. Today, the U.S. Treasury market trumps all others in size and, in the eyes of investors…, in safety as witnessed by the mad rush into Treasury bonds in times of recent global trouble."

Similarly, Gary Shilling states, "American stock market capitalization is four times that of China, Japan or the U.K. and is over three times the Eurozone's…Almost 50% of Treasuries are held by foreigners but only 9.1% of Japan's government net debt is owned by non-Japanese. According to the IMF, 62% of the world's currency reserves are in dollars. The 24% in euros is down from 29% four years ago. Foreigners so love investing in the U.S. that at the end of 2012, it exceeded U.S. investment abroad by $4.4 trillion, up from $4 trillion a year earlier."

"Investors want to go where it's free and open; they don't like China. China periodically freezes their currency. They did that for example during the Great Recession. They had let it float up but then they froze it when they got worried. They're now letting it float a bit, but they turn it on, they turn it off. Other currencies are much less free to people moving out. They typically manipulate currencies in a lot of places. The Swiss, for example…froze their currency 1.2 to the Euro when everybody wanted to be in the Swiss Franc because they worried that a strong currency would kill their exports to the Eurozone, which is their major trading partner."

"Things can change over time but one statistic that I think is very important is global forex trading. Now, there's two sides to this so the numbers add up to 200%, not 100%, because for every sale there's a buy. But if you look at the trading, in 2001, the U.S. dollar accounted for 90% of all the daily trading in currencies. In 2013, it's down from 90% to 87%. But if you think of all that's happened in that time, the euro currency had come in, China has gotten stronger, etc. But it still has only declined 3 percentage points and it's way ahead of anything else. The second one today is the euro at 33% versus [the USD at] 87%, the yen 23%, sterling 12%-in other words, this is the currency that people transact."

"The sixth characteristic is credibility. And that's the only one where you can say there's been any questioning of the dollar. And it is true that last year that Standard & Poor's did downgrade the U.S. from triple AAA to AA+, but that hasn't really hurt. You might remember that when they did that, Treasuries actually rallied…and it has not changed the willingness of foreigners to put money into dollar denominated assets. So, the credibility issue is the only one that is not absolutely triple-A, but it hasn't had any decided effects so far."

Wednesday, November 20, 2013

U.S. Manufacturing Only Has Jobs for the Skilled Few

Even with the recent strength in the U.S. manufacturing sector, labor-intensive industries won’t return to the U.S. as long as the huge labor compensation gaps persist with Asian and other developing countries. Sure, there will be niches created when quick delivery, changes in fashion and other developments require production to be close by.

The majority of what could be rapid growth in U.S. manufacturing will probably come from capital-intensive, robotics-intensive production that doesn’t require many people. Those employed in this area will need considerable skills. Furthermore, these are the industries that show rapid productivity growth as new technologies are introduced. But when productivity growth is robust, output will rise substantially without much increase in employment.

There are concerns about the lack of engineers and other professionals who make sophisticated manufacturing possible, especially as highly skilled members of the postwar generation reach retirement age. In 2008, the latest available data, 4 percent of bachelor’s degrees in the U.S. were in engineering, compared with 17 percent in all of Asia and 34 percent in China. That means that more H-1B visas allowing foreign professionals to work in the U.S. will be awarded. A Senate-passed immigration measure increases the number of these visas to 110,000 a year, from 65,000 now.

One of the most exciting new technologies is additive manufacturing, popularly known as 3-D printing, which uses layers of materials ranging from wood pulp to cobalt to human tissue to make three-dimensional objects of almost any shape from a digital model. Machines have been developed that can print more than 1,000 materials, and the layers can be mixed to embed sensors and circuitry such as those used for hearing aids and motion-sensing gloves.

Another form of additive manufacturing is cold spraying, in which metallic particles are blasted at high speeds and fuse into the desired shapes.

Industrial robots can operate 24 hours a day with no coffee breaks. Their cost compared with human labor has fallen 50 percent since 1990. Thanks to high-technology manufacturing, Boston Consulting Group estimated that 30 percent of Chinese exports to the U.S. could be economically produced domestically by 2020.

The U.S. won’t enjoy much of an advantage from lower energy costs. Crude oil prices are reasonably uniform throughout the world. The U.S. benchmark is West Texas Intermediate; Brent is the standard elsewhere, but the two move pretty much together. There have been differences, specifically the recent discount of WTI because leaping U.S. output was bottled up at Cushing, Oklahoma, until pipelines could be reversed to let it flow to the Gulf of Mexico. Then the gap closed.

Sunday, November 17, 2013

Shilling: Fed to keep interest rates near zero

Gary Shilling expects the Fed to keep interest rates near zero until the unemployment rate falls below 6.5%. He notes that the decline in the labor force participation rate has made the unemployment rate appear lower than it really is.

Tuesday, November 5, 2013

Gary Shilling: South Korean equities looking attractive

South Korea has emerged as one of the few relatively solid rocks amidst a sea of leaky emerging market barges.

Investors of late have been rushing into South Korean equities amidst the Fed's recent discussion of tapering its $85 billion per month in security purchases, as we'll discuss later.

As of the end of October, the KOSPI index was down only 1% from the October 2007 peak. In contrast, the MSCI World index is off 4% since then and the MSCI Asia Pacific Index has dropped 14%."

Tuesday, October 29, 2013

Gary Shilling: The Wealthiest Are in the Taxmans Crosshairs

After the recent recession, the personal-taxes-to-personal-income ratio dropped well below the 12.3 percent long-run average, a casualty of the tax cuts, depressed household incomes and the weak recovery. In combination with depressed corporate tax collections and increased federal spending -- especially in 2009, when outlays equaled 6 percent of gross domestic product -- these forces pushed the federal deficit to more than $1 trillion a year.

At the time, the widespread conviction in and out of Washington was that “fat cat” Wall Street bankers, as President Barack Obama labeled them in 2009, were responsible for the financial collapse, prolonged recession and slow recovery. Americans at the top have regained all they lost and then some; many lower on the income scale, however, remain mired in high unemployment and declining real wages.

Long-term unemployment leapt to record levels. The number of those who prefer full-time jobs but are offered only part-time work skyrocketed to an all-time high. And job openings began to grow much faster than new hires as cautious employers became choosy. As of August 2013, payroll employment was 1.9 million below its January 2008 peak, even though the working-age population grew by 13.1 million in that period. Payroll growth slowed in September, with 148,000 workers added, following a revised 193,000 gain in August, according to Labor Department data released yesterday.

Furthermore, the wealthy, with their large stock holdings, have benefited most from the bull market that began in March 2009. Americans who aren’t in the highest income brackets tend to have most of their wealth concentrated in their homes; in 2010, the value of the residences of the top 10 percent was only five times that of the bottom 20 percent. The stock holdings of the richest 10 percent were 50 times greater. And even with the recent rebound, the median prices of single-family houses are still 24 percent below the April 2006 peak.

Given all this, it seemed inevitable that taxes would go up. At the beginning of this year, the Social Security tax paid by employees returned to 6.2 percent from 4.2 percent on income less than $113,700. But other changes affected only high-income earners: The rate returned to 39.6 percent from 35 percent on couples’ incomes of more than $450,000; capital-gains and dividend rates rose to 20 percent from 15 percent. For joint filers with more than $300,000 in adjusted gross incomes, personal exemptions were phased out and as much as 80 percent of itemized deductions were eliminated.

As is often the case when the personal-taxes-to-personal-income is low, the Internal Revenue Service has accelerated audits of rich taxpayers. It has even created a separate division, the Global High Wealth Industry Group, to enforce compliance. In the 2012 fiscal year, the IRS audited 5.4 percent of tax returns of Americans who earned between $500,000 and $1 million, up from 3.4 percent in 2011. Audits of those in the $1 million to $5 million category increased to 12 percent from 6.7 percent; 21 percent of people reporting $5 million to $10 million in income were audited, compared with 12 percent for 2011.

More recently, the IRS sent 20,000 letters to small-business owners, seeking to establish whether they were underreporting their business income. The tax-collection agency is taking advantage of a 2008 law that gives it broader access to merchants’ credit- and debit-card records, which it can compare with tax returns. Unusually large credit-card transactions suggest underreporting of cash sales. Underreported income constitutes the bulk of the so-called tax gap, the difference between what taxpayers owe and what they pay, according to the IRS. In 2006, the latest data available, the total gap was $450 billion.

The IRS is also pursuing Americans with undeclared investment accounts in Switzerland and other tax havens. The Swiss government protected the country’s banks from disclosing information on tax dodgers to U.S. authorities. Threats to cut off those banks from business in the U.S. and cooperation from a former employee of UBS AG (UBSN) forced a change of policy.

In July 2008, a U.S. Senate investigation found that the Treasury loses about $100 billion a year to offshore tax evasion; UBS was found to have hidden about $20 billion belonging to 20,000 Americans. UBS subsequently agreed to hand over the names of 4,450 U.S. account-holders and pay a $780 million fine. In 2011, Credit Suisse Group AG (CSGN) also agreed to disclose the names of clients suspected of dodging U.S. taxes.

Switzerland is the biggest offshore banking haven, with $1.8 trillion in foreign assets under management. Five percent of the total is owned by Americans. Swiss banks are now rushing to cooperate with the IRS and tax authorities in other countries. The government recently agreed to share data for tax purposes with almost 60 countries by signing the Organization for Economic Cooperation and Development’s tax information agreement. Switzerland also has agreed to follow U.S. law requiring foreign banks to provide data on U.S. accounts.

Banks in other tax havens such as Andorra, Liechtenstein, Singapore, the island of Jersey, the British Virgin Islands, the Cayman Islands and Monaco are also opening to U.S. tax authorities. And the IRS is pursuing money hidden in Caribbean, Israeli and Indian banks. Other countries such as Austria and Luxembourg have relaxed bank secrecy laws.

In 2008, the IRS established an amnesty program that allowed Americans with undeclared offshore accounts to avoid criminal prosecution by paying all taxes owed, plus interest for the past six years and a penalty of 20 percent of the accounts’ highest values. About 15,000 tax dodgers entered the program and 23,000 more signed up for a more punitive effort in 2011. The U.S. has collected $2.2 billion from the 2009 amnesty cases that were closed as of September 2011, with average revenue per case of $80,000. For 2009-2012, the IRS collected $5.5 billion in unpaid taxes and penalties, and it expects to collect $5 billion more.

Yes, the recent tax increases have been aimed at the “fat cats.” It is also true the IRS has stepped up audits of the wealthy and small-business owners and hotly pursued tax dodgers with foreign investment accounts.

Yet the invisible hand that underpins shifts in taxation has also probably been at work in pushing up the personal-taxes-to-personal-income ratio because the increase in Social Security taxes on employees hit lower-income people hardest in relation to their pay. Of course, the $1 trillion federal deficits were also an inducement for higher government revenue.

The invisible hand overcame the declines in real weekly wages and real median incomes. It also prevailed over the still-depressed prices of houses, the biggest asset for all but the richest. About two-thirds of homeowners have mortgages, and those with middle and low incomes account for the greatest share. The home equity of mortgage holders has risen along with house prices recently. Still, on average, it’s only 23 percent, less than half what it was in 1983.

Households are still overburdened with debt. The total has fallen to 104.7 percent of after-tax personal income in the second quarter, from 130 percent, but it still is well above the 65 percent norm in the early 1980s. Furthermore, the decline so far is almost entirely due to falling home-mortgage debt, largely a result of write-offs of bad mortgage loans. Much smaller credit-card and home-equity revolving debts have declined, though student loans have ballooned.

Household net worth has risen in relation to after-tax income, but remains below the peaks of the late 1990s and the mid-2000s. Moreover, 43 percent of the increase in the ratio since the recessionary low in the first quarter of 2009 is due to higher equity prices and, as discussed earlier, individual stockholders are predominantly high-income people. Only 8 percent of the increase is the result of the appreciation of wider ownership of real estate.


Monday, October 28, 2013

Businesses May Be Next Target of Higher Taxes - Bloomberg

The personal-taxes-to-personal-income ratio was 11.7 percent in August, almost back to the 12.3 percent long-term average. That eases the pressure on the invisible hand to push for higher tax rates or more aggressive collections.

The federal budget deficit remains huge. But it is declining: The Congressional Budget Office says the shortfall narrowed to $642 billion in the fiscal year that ended Sept. 30, from $1.1 trillion in the 2012 fiscal year. Furthermore, persistent political gridlock in Washington makes big tax law changes unlikely.

Chronic slow growth and limited upside potential for stock and housing prices probably mean that personal taxes won’t grow faster than personal income in coming quarters, restraining growth in the taxes-to-income ratio. However, other forces could influence taxes. Congress and the Obama administration were unable to avoid a partial government shutdown this month and a fight over lifting the $16.7 trillion debt ceiling.

Beyond those twin crises, Washington needs to deal with the long-postponed costs of Social Security and Medicare benefits for the increasingly large number of postwar-generation workers who are retiring. This is the reason that the narrowing of the federal deficit projected by the CBO will end in the 2016 fiscal year. In later years, substantial increases in Social Security and Medicare payroll taxes could cause the ratio of taxes to income, including social insurance taxes, to rise above its long-run flat average of 19.7 percent.

The changes in personal taxes of recent decades have been accompanied by some major changes in corporate taxation. U.S. businesses are clamoring for tax reform, especially changes aimed at lowering the 35 percent top rate, which is about the highest in the world, though it’s down from 52 percent in 1964.

The real rate is 40 percent when state and local government corporate income taxes are included. In late July, President Barack Obama offered to work with Congress to overhaul corporate taxes on the condition that any one-time revenue gains are used to fund spending on programs he favors. In mentioning one-time gains, he indicated that he is, in effect, thinking about eliminating many tax code provisions that reduce the effective corporate profit tax rate well below 35 percent.

The Government Accountability Office estimates that the effective rate on worldwide income for large, profitable U.S. companies averaged 12.6 percent in 2010. When taxes paid to foreign as well as U.S. state and local governments are included, the effective rate rose to 16.9 percent, still only about half the 35 percent top federal marginal rate. Federal corporate tax collections dropped to $181 billion for 2011 from a peak of $370 billion for 2007, at the height of the housing-led boom. They are expected to rise to $288 billion for the 2013 fiscal year, which ended Sept. 30.

An especially contentious issue is foreign earnings of U.S. companies that aren’t subject to taxes until they are repatriated. By contrast, most other developed countries tax only domestic profits. Many U.S. corporations have no incentive to return foreign earnings and pay the U.S. taxes. But there is intense political pressure for them to do so.

In May, Apple Inc. Chief Executive Officer Tim Cook testified before the Senate Permanent Subcommittee on Investigations. The panel headed by Senator Carl Levin, a Michigan Democrat, found that Apple avoided paying $9 billion in U.S. taxes in 2012, and $74 billion over the past four years, largely by basing profitable operations in Ireland, which has consistently used low tax rates to attract foreign business.

Levin called this “the Holy Grail of tax avoidance.” Cook said Apple favored corporate tax reform, including a lower tax rate, but with a reasonable levy on foreign earnings. The adverse publicity led the Irish government to announce plans to change the tax rules affecting Apple and other companies beginning in 2015.

Audit Analytics estimated that total U.S. corporate profit parked abroad rose 15 percent last year, to $1.9 trillion. This partially reflects the 70 percent increase in offshore earnings in the last five years. Offshore profits are normally taxed where they are earned, so companies often use a technique known as transfer pricing to shift earnings to low-tax countries. The tactic sometimes involves moving valuable intellectual property so the high profits from royalty payments will be realized in lower-tax jurisdictions.

A reform of U.S. corporate taxes could reduce the top marginal rate, but at the expense of higher taxes elsewhere. Congressional proposals include a special low tax rate on profit held offshore, which would encourage companies to bring the money home. Eventually, it could mean an end to taxes on overseas earnings, bringing the U.S. in line with other countries. Other ideas being proposed to raise revenue include stretching out depreciation timetables and changes in inventory accounting.

From the standpoint of economic efficiency, trading corporate tax loopholes for lower tax rates makes sense. As companies adapt to special tax provisions, normal market-driven responses are distorted. In any event, major tax reform and simplification for corporate or personal taxes is very unlikely as long as gridlock and partisan animosity persist in Washington.

In addition, the persistence of large federal deficits means the long-run decline in corporate tax rates is unlikely to continue unless lower rates are traded for higher business taxes elsewhere.

Meanwhile, corporate profit and the tax revenue they generate appear vulnerable, even if positive economic growth persists.

Even as corporate taxes as a percentage of profits are going down, taxes as a share of gross value-added of corporate business -- essentially corporate sales -- have been flat since the early 1980s because profit margins have been rising. In recent years, U.S. businesses have slashed labor and other costs in response to the lack of pricing power and declining inflation as well as the meager sales volume growth in the sluggish global recovery.

But productivity growth from cost-cutting and other means is no longer easy to come by. Also, the growth in value from productivity-enhancing technology equipment and software in the decade ending 2011 has been the weakest since World War II. Furthermore, neither capital nor labor has the upper hand indefinitely in a democracy, and compensation’s share of national income has been compressed as profit’s share leaped.

Corporate earnings are also vulnerable to the strengthening dollar, which reduces the value of revenue from exports and foreign earnings by U.S. multinationals. And exports and foreign earnings of U.S. companies are under pressure, especially in developing countries where growth has slowed.

China’s growth is slowing as it shifts to an economy led by consumer demand and away from exports, which are depressed by weak demand from the U.S. and Europe. China has also vastly overbuilt its infrastructure. Vacant cities and other excess capacity could become considerable problems, particularly for the lenders who financed them. Deceleration in China implies slow growth for the other developing countries that have thrived by exporting commodities and components to the Chinese manufacturing juggernaut.

Meanwhile, the prospective tapering of Federal Reserve asset purchases and the related interest rate increases that have already occurred are causing financial harm to those nations.

Earlier, the likes of Brazil, India, Indonesia and Turkey were almost overwhelmed by inflows of hot money that drove up the value of their currencies and financed their large current-account deficits. Now that hot money is rushing out, leaving them with three unsavory choices. They can allow their currencies to slide, which aids exports but also promotes inflation as import prices jump. They can raise interest rates to help retain foreign money, but that threatens growth. Or they can impose capital controls to keep money from leaving, but that discourages future inflows and triggers huge outflows when controls are lifted.

The invisible hand will probably continue to favor taxpayers when the tax-to-income ratio rises considerably above the 12.3 percent long-run average, and it will increase their tax payments when the ratio drops substantially below. The long-term downtrend in corporate tax rates, however, is unlikely to persist unless lower rates are traded for higher business taxes elsewhere.

(A. Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” This is the first in a three-part series. Read Part 1 and Part 2.)

To contact the writer of this column: A. Gary Shilling at insight@agaryshilling.com.

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

A Gary Shilling

A. Gary Shilling, a Bloomberg View columnist, is president of A. Gary Shilling & Co., a consultancy in Springfield, ... MORE

View the original article here

Monday, October 21, 2013

Tapering is just a start

"When the economy resumes normal growth after the Age of Deleveraging is over, these excess reserves will spawn huge loans and money expansion, propelling the economy past full employment and into serious inflation. So the Fed's major job is to get rid of these excess reserves by selling securities. Tapering — i.e., adding more to this hoard — is just the start.”

source: businessinsider

Monday, October 14, 2013

Shilling concerned about interest rates and fed bond buying

Gary Shilling talks about the Fed bond buying program and its concern. 

"For now, because economic growth is tepid, this isn’t producing any overheating in the world of bank lending. But when the economy resumes faster growth, excess reserves could propel the economy through full employment and into serious inflation,” That may not happen for a few years, he adds. But the risk is still one for the Fed to ponder, because that giant balance sheet of bonds can’t be adjusted in a hurry. “If assets are sold off rapidly, interest rates could well leap, precipitating a recession.”


Sunday, October 13, 2013

SHILLING: Im Balanced Between Risk-On And Risk-Off

Gary Shilling has gone from tilting toward seven-risk off trades, to being "balanced between 'risk-on' and 'risk-off' as we prepare to move either way as the fog clears." This comes as the global economic outlook remains mixed and as the Fed takes its time clarifying its plans to taper its $85 billion in monthly asset purchases.

These trades include: 1. Modestly long treasury bonds. "They've been beaten up, maybe too much so. Also, they serve as an anchor against a sudden Grand Disconnect-closing shock that something like the government shutdown and the looming debt ceiling crisis may precipitate." 2. Long the dollar. 3. Short emerging market stocks and bonds. 4. Long U.S. dividend-rich stocks.

Shilling continues to be cautious and "advocates heavy cash positions."

"The percentage of S&P 500 stocks with P/E ratios within 20% of the index level is near its highest level in nearly 20 years (the height of the financial crisis notwithstanding)," writes Brian Belski of BMO Capital Markets. This suggests that investors are valuing stocks that have different earnings growth profiles in a similar manner. "From our perspective, the main culprit has been the strong outperformance of value strategies this year."

"We believe that as QE has driven stock prices higher, investors have sought out more attractively priced areas of the market. The result has been a surge in price multiples for areas at the lower end of the valuation spectrum making market valuation more homogeneous.

"Going forward we would urge investors to avoid such singular investment approaches and instead incorporate other variables (such as earnings growth) when making decisions. This is particularly relevant in the current environment since earnings growth among US stocks has become increasingly more disperse (Exhibit 2, right) – a trend we expect to continue given the stage of the current cycle."

While we've been bombarded with headlines about the S&P 500 hitting new all-time highs, the inflation adjusted index tells a different story. JC Parets at All Star Charts writes that the inflation adjusted chart shows "is the consistency of the lower lows and lower highs since the year 2000. Hardly the uptrend and bull market that we hear about so often." 

"I think it’s important that when I speak with investors, they understand how in Real terms, not only is the S&P500 not at all-time highs, but actually down 20% over the last 13.5 years."

UBS Financial Services largest wealth management team in San Diego that managed $540 million in client assets has gone independent, according to Investment News. The team includes Ajay K. Gupta, and two other partners that have registered with the SEC. Gupta and his partners moved because they wanted "access to new technology, a broader choice in clients and independence as a fiduciary adviser to its 119 family clients," reports Trevor Hunnicutt at Investment News. Gupta will write UBS a seven-figure check.

The ratio of companies providing negative earnings guidance, to those providing positive forward guidance, has been rising. This is usually interpreted as a sign of excess optimism.  But Deutsche Bank's David Bianco writes that "investors should ignore these aggregated stats." 

"We have repeatedly argued that guidance ratios are noisy and unreliable. Only 20% of companies provide quarterly guidance, the mix changes from period to period, the ratio is not earnings weighted and does not differentiate between a 1% or 10% change in guidance.

"Bottom-up EPS growth and estimate revision trends are more insightful. Btm-up 3Q S&P EPS declined only 3.2% among the least in two years and est. EPS growth just prior to reporting is the highest in over a year at 4.1%. Our $28 3QE EPS implies the usual 3-4% weighted average beat."

Monday, October 7, 2013

Slow growth for next five years

 Expect slow economic growth for the next four to five years, says economist A. Gary Shilling.

“De-leveraging periods after major financial crises usually take about a decade. We’re five years into this, [and there’s] another five years to go,” Shilling says.

He and Martin Barnes, chief economist at BCA Research, each presented their market predictions at the CFA Society Toronto’s 56th annual forecast dinner Oct. 1.

But those who say a sluggish North American economy is here to stay are wrong, Shilling adds.

“That’s what I call theory follows fact,” he says, adding that those analysts are underestimating the long-term strength of the U.S. economy.

A higher birth rate than other developed countries, an entrepreneurial spirit and low union membership are some of America’s existing economic advantages, he says.

As the economy continues to recover—which he predicts will happen with a GDP growth rate of 2%—the dollar will also strengthen.

The country is also moving toward energy independence, and will rely less on foreign investment as consumers spend more, he adds.

Right now, Americans are paying down debt and saving cash, and that is cancelling out the effects of fiscal and monetary stimulus, he says.

Barnes agrees the economy will continue to improve, and predicts a slightly higher rate than Shilling.

“My bottom line on the economic outlook is that you’ll feel better in a year’s time, but you still won’t feel great,” he says. “We could get back to 3% [growth] in North America without too much difficulty.”

But says consumer debt in Canada–163% of income–is unsustainable.

Neither Shilling nor Barnes think inflation rates will rise.

“Inflation is going to stay pretty close to zero, or where it is now. The risk is that [we’ll] go into deflation, not inflation,” says Shilling.

They also agreed the stock market is due for a correction.

On bonds, Shilling and Barnes say they will rally.

“Ten-year bond yields will still be less than 3.5% in a year’s time. They will go up from here, but they’re not going to go up to a level that’s a problem, says Barnes.

The loonie could get back to parity with the U.S. dollar in the next year based on strong commodity prices, Barnes says.

But Shilling adds the U.S. dollar is due for a boost as the recovery continues. It will be helped along by the underlying strength of American financial markets, and the lack of an alternative currency for trading and investing.

But he’s concerned the credibility of the U.S. political system could affect the dollar’s strength as issues like government shutdowns and legislative gridlock become more common.

Sunday, October 6, 2013

Is there a disconnect between U.S. markets and the economy?

Gary Shilling, former Merrill Lynch Chief Economist and President of A. Gary Shilling & Company, says there is a “grand disconnect” between the robust stock market and the economic reality. His advice? Short stocks, buy treasuries and hold cash.

Monday, September 30, 2013

Who is Gary Shilling ?

A. Gary Shilling, RIA, Ph.D.

Gary Shilling is President of A. Gary Shilling & Co., Inc., and publisher of INSIGHT, an economics forecast report. He has been a Forbes magazine columnist for three decades. His latest book, The Age of Deleveraging, explores what to invest in, what to avoid, and how to cope with a deflationary, slow-growth economy. Institutional Investor magazine ranked him as Wall Street's top economist. In 2003, MoneySense Magazine named him the third best stock market forecaster in the world. He set up the Economics Department at Merrill Lynch and served as the firm's first chief economist before joining White, Weld & Co. as Senior Vice President and Chief Economist.


Sunday, September 29, 2013

Economic Advantage America - The Market Oracle

Today's Outside the Box, which comes to us from good friend Gary Shilling, is unusual because that old confirmed bear is waxing positively bullish about the future prospects of the US. In doing so he mirrors my own views. It is just a matter of time before I go from being bearish on the US because of the dysfunctional US government to being an irrational perma-bull, at least for the next few decades. There is just too much upside potential with this country of ours — if we can muster the political will to handle our serious fiscal issues.

Gary builds the positive case beyond the fiscal concerns, and a compelling case it is. In six crucial areas, he says — demographics, entrepreneurial activity, labor relations, domestic vs. foreign debt financing, currency strength, and energy independence — the US is better positioned than any of its major competitors.

Gary pays particular attention to the importance of a strong US dollar. The dollar is not even close to being unseated as the world's primary reserve and trading currency; but that is not to say there won't be currency challenges ahead, with the biggest global currency war since the 1930s just getting fired up. Already competitive devaluations and protectionist measures are rampant around the globe. Can the US take the high road? If we want to maintain the privileged position of our currency, we must.

I’m in Chicago this afternoon doing interviews and catching up on my reading before giving a speech this evening. Tomorrow morning I’m off to the Dakotas, where I will spend the day with oil entrepreneur Loren Kopseng talking about shale oil and gas. Coincidentally, I just got a question for Loren from the research team at Mauldin Economics. Can I ask him about the new, potentially $20-trillion shale oil find in Australia and what he thinks of it? I’m sure it won’t dampen his enthusiasm for all things Bakken, but it does go to illustrate that shale oil is not just a US phenomenon. Oil has always been there. It just takes technology and the willingness and ability to use it to get it out of the ground. Plus high enough energy prices, of course.

I have been reading about new shale oil discoveries all over the world. Enthusiasm about oil and gas discoveries in the eastern Mediterranean was palpable in Cyprus. I should note that it was a Texas company that was crazy enough to go after that oil, which will soon make Israel energy independent and supply a great deal of energy to Europe. And we note that Russia is very concerned about its potential port in Syria. Just a coincidence, I’m sure.

The first thought that leapt to mind upon reading the query about Australian oil was, “Ho-hum, yet another oil discovery.” But then the thought that followed very closely was that this is a country whose people more closely resemble crazy Texans than anyplace else I have been (and for whatever reason, I find that a good thing). There is plenty of capital Down Under, and it would not surprise me if they figured out how to exploit these shale oil reserves. I’ll have to do a little homework before I head out to Saudi Arabia in January. There will be interesting questions to ask my hosts. The world just keeps getting more interesting every day. (I just watched a lengthy presentation on robotics and continue to be amazed at the progress that is being made. Interesting times indeed!)

I’m not sure where I will be when I write this week's letter, but it will show up again this weekend. And have a great week. ($20 trillion? Really? Really!?! And I thought Texas oil guys were irrationally exuberant.)

Advantage America

(excerpted from the July 2013 edition of A. Gary Shilling's Insight)

Beyond what I believe are bright prospects for a return to rapid U.S. economic growth and the resulting decline in federal debt-to-GDP, Americans in future years will enjoy six major advantages over developed and developing country competitors in the globalized world.

1. Demographics

Demographics are one. The current immigration debate in Washington isn't over throwing illegals out but over how to give them legal status and a path to citizenship while attracting highly educated and skilled newcomers. Only a few other countries such as Canada and Australia are at least as open as America.

Immigrants tend to be younger than current residents and have higher birth rates, especially Hispanics. So the U.S. fertility rate of 2.06 is close to the 2.1 births per child-bearing woman needed to sustain the population in the long run.

In contrast, the fertility rates in all European countries and even Canada and Australia are below the reproduction level. Japan's, the lowest at 1.39, is compounded by the total lack of any immigration. China's fertility rate is just 1.55 because of the one-child-per-couple policy, which the government is reconsidering.

Most immigrants have jobs, either those requiring high skills and education or low level work that natives shun. They're not old enough to draw Social Security and Medicare benefits in large numbers but their payroll taxes help provide benefits for retiring postwar babies.

Because of aging populations in all major countries, immigrants are needed to keep the 15-64 working-age population from falling faster as a percentage of the total. By 2040, the U.S. ratio, 60.3%, is projected to be the highest of any developed country. China's ratio falls rapidly from 72.4% in 2010 to 63.1% in 2040 due to its one-child policy, and already, new labor force entrants age 15-24 are declining in number.

Even if the 2 million people who left the labor force in the last two decades for non-demographic reasons never re-enter because their skills are rusty or they prefer disability benefits and food stamps, it won't impede robust real GDP annual growth of about 3.5% after the Age of Deleveraging is completed. With 2.5% growth in productivity per year, employment would need to rise 1% annually. That's about 1.44 million more workers per year.

The working-age population in future years is projected by the Bureau of Labor Statistics to rise about 2.2 million per annum. With the current participation rate of 64% (Chart 2), that would produce 1.4 million new job-seekers, about the same as new labor demand, assuming these new entrants' skills match those that are needed. And a declining unemployment rate would add more to the employed.


2. Entrepreneurial Spirit

Another big advantage for the U.S. is the American entrepreneurial spirit, observed by de Tocqueville in the 1830s and still going strong today. Despite perceptions of an erosion of U.S. economic vigor, America still seems way ahead of whoever is in second place. It starts with the education system, which has many faults but does encourage free inquiry and the challenging of accepted doctrine.

Foreigners attending U.S. colleges and universities are often shocked when they are encouraged to question professors. Japan discourages individuality. "The nail that sticks up must be hammered down," is their expression. Chinese education involves rote learning with no emphasis on student inquiry, begging the question: How is China going to grow after she gets her labor force fully employed and catches up to Western technology?

Furthermore, China's economy remains heavily tied to bureaucratic, inefficient state-owned enterprises that produce about half of GDP and employ around a quarter of the labor force. Over half of companies listed on the Shanghai Stock Exchange are SOEs, the direct result of the government's preference for them as IPO issuers while private businesses are starved for capital. SOEs are so inefficient that they require loans at sub-market rates from the government banks, subsidized by low deposit rates.

Government direct subsidies to about 90% of the companies listed on China's stock exchanges, most of them SOEs, were up 23% last year to $13.8 billion. These subsidies were equal to 4% of total profits, which rose less than 1% and were in the form of cheap land, tax rebates, support for loan repayments and simple cash. Without subsidies, many Chinese companies would fail due to excess capacity and weak export demand.

With the renaissance of U.S. oil and gas production and resurgence of robotic and capital-intensive manufacturing, the U.S. bested China for the first time since 2001 as the more favorable place for foreign direct investment, according to a recent survey.


Leaping American oil and gas production has created a global energy supply cushion that allows the U.S. to deal with Iran and other trouble spots without debilitating spikes in oil prices.

3. Labor Flexibility

An added long-term advantage for the U.S. in international competition is her flexible labor markets. Labor unions are becoming a thing of the past, especially in the private sector and now increasingly among state and local employees (Chart 4). Partly as a result, U.S. wages are flexible on the down side. Surveys show that of the people out of work for six months (Chart 5) who do find new jobs, a third work for less money than previously.

Working for less is almost unheard of in Europe and lifetime employment is the rule in Japan. China is increasing minimum wages about 25% per year to provide more consumer spending power as she strives to shift from an export-led to a domestically-driven economy. But higher wages erode the global competitiveness of China and production is shifting to cheaper locales like Vietnam, Bangladesh and Pakistan.

The auto industry is a case in point. After the Great Recession drove GM and Chrysler into bankruptcy, U.S. automakers introduced $14 per hour wages for new employees, half the level of veterans. So in 2011, the average pay of U.S. autoworkers including benefits was $38 per hour compared to $66 in Germany and $37 in Japan. U.S. pay has increased $3 per hour since 2007, but $12 in Japan and $14 in Germany. As a result, vehicles from U.S. auto plants are beginning to be shipped abroad in numbers.

4. Declining Need For Foreign Financing

An additional major advantage for the U.S. in future years is the likely decline in dependence on foreign financing. The current account deficit measures the extent that U.S. investment exceeds the combined saving of consumers, business and government. With consumer saving low and large federal deficits, the current account deficit has been sizable, about $400 billion at annual rates. This deficit is financed by increases in foreigners' holdings of stocks, Treasurys, real estate, etc., as they recycle dollars back to dollar-denominated investments.

I don't share the fears of some that the Chinese or others will dump their huge holdings of Treasurys and other dollar-denominated securities (Chart 6). They're not suicidal, and if they started selling, the value of their remaining Treasurys would collapse and a global recession would no doubt follow as interest rates skyrocketed. China and other export-led economies would be the big losers in the resulting buyers' market.

But accidents can and do happen, so America's global status will improve if the trade and current account deficits shrink. That's likely if my forecast of a rise in the household saving rate back to double digits unfolds (Chart 7).

As I've discussed in my recent book, The Age of Deleveraging, and in many past Insight reports, Americans have little choice but to save more. They no longer trust their stock portfolios as they did in the 1980s and 1990s to substitute for saving out of current income to educate their kids and finance early retirement. The nosedive in house prices after heavy cash-out refinancing of mortgages and home equity loans has removed much of the home equity they earlier used to finance oversized spending. The postwar babies have been notoriously poor savers and desperately need to keep working and save much more for their old age.

As the saving rate rises, spending will grow more slowly, the reverse of what occurred when the saving rate slid from 12% in the early 1980s to 1%. That drove consumer spending growth about a half-percentage point per year faster than after-tax income and fueled the domestic economy. It also propelled the many Asian and other lands whose economies are driven by exports, largely to U.S. consumers. For every 1% rise in American consumer spending, U.S. imports—the rest of the world's exports—rise 2.8% on average.

A rising consumer saving rate will retard the growth in spending on everything, including imports. This will curtail the exports of export-led economies like China, whose leaders are aware of this likelihood and are working to shift that economy to domestic emphasis. In any event, the resulting shrinking of the U.S. trade and current account deficits will put fewer dollars in foreign hands that will be recycled into U.S. investments.

But fewer will be needed since money is fungible, and the high consumer saving will provide more money to replace foreign funds in financing the federal deficits and other needs. At a 10% household saving rate, $1.2 trillion would be available to finance federal deficits, now less than $1 trillion, as well as business net borrowing.

On balance, the U.S. will meet more of its financing needs internally, but probably not all. If the American trade and current account deficits disappeared completely, the many Asian, Latin American and other import-led economies would be in severe trouble until they converted to domestically-driven states. Also, without U.S. current account deficits, the dollars that almost every foreign country depend on as their primary reserve currency would be difficult to accumulate.

Needless to say, as long as the economies and other developing countries remain export-led, they will be coupled to the economic health of the buyers of their exports, principally the U.S. and Europe. In the fall of 2007, on the eve of the Great Recession, many thought that China and India would lead global growth and indeed support the U.S. economy as the American housing and consumer sectors faltered.

Nevertheless, we wrote in "The Chinese Middle Class: 110 Million Is Not Enough" (Nov. 2007 Insight), that China's middle class, those with discretionary spending power, was growing but not yet big enough to carry the economy. Ditto for India. We predicted that "the looming U.S. recession will spread globally," including to China.

Well, as they say, the rest is history. China's growth collapsed to recession levels (Chart 8) and was only revived by massive government stimuli. China's middle class is growing rapidly, but domestic spending is not yet big enough and China's exports are still important enough to keep her coupled to the West. This dependency is magnified by her immense excess capacity problem and ongoing financial crisis. It will probably take about a decade before China's domestic economy can carry the economic ball.


5. Strong Dollar

A rising dollar is another long-run advantage for the U.S. in the global arena, reflecting the economic, political and financial strength of America as well as the buck's continuing status as the world's primary reserve and trading currency.

A review of history since ancient times reveals six characteristics of a dominant global currency. The buck will likely remain the winner in at least five of the six for many years.

1. Rapid growth in the economy and GDP per capita, promoted by robust productivity growth. This is probably the most necessary condition for a dominant international trade and reserve currency. It was key to British sterling's success in the 19th century and the dollar's superior position since then. It's also necessary to support globally-dominant military structures in modern democracies while still satisfying voters with acceptable standards of living.

In the last decade, the U.S. has excelled in productivity gains among developed areas. Her emphasis on entrepreneurial activity and American superiority in new technologies suggest this lead will persist.

2. A large economy, probably the world's biggest. That was true of ancient Rome, which had an unusually effective administration and centralized control for the times. With the breakdown of communications in the Middle Ages, size was less important and allowed relatively small Italian city-states and their currencies to achieve international primacy. In modern times, Singapore and Switzerland meet our other qualifications but are just not big enough to have primary currencies.

With rapid productivity growth and relatively open immigration, America will probably continue in this role. Population is falling in Japan and will soon follow in other developed lands as well as China with her one child-per-family policy.

3. Deep and broad financial markets. Internationally, money—especially today when it can be transferred anywhere in a split second—wants to be where the action is. That requires not only a powerful and large economy but also deep and broad markets in which to invest. Today, the U.S. Treasury market trumps all others in size and, in the eyes of investors (Chart 9), in safety as witnessed by the mad rush into Treasury bonds in times of recent global trouble.

Similar American stock market capitalization is four times that of China, Japan or the U.K. and is over three times the eurozone's (Chart 10). Almost 50% of Treasurys are held by foreigners but only 9.1% of Japan's government net debt is owned by non-Japanese. According to the IMF, 62% of the world's currency reserves are in dollars. The 24% in euros is down from 29% four years ago. Foreigners so love investing in the U.S. that at the end of 2012, it exceeded U.S. investment abroad by $4.4 trillion, up from $4 trillion a year earlier.


4. Free and open financial markets and economy. Foreign investors are willing to hold a country's currency if they are convinced they can invest it in financial or tangible assets in that country with few restrictions. The U.S. is essentially open, which is necessary if the Chinese and Japanese are to continue to recycle their current account surpluses with the U.S. into Treasuries and other American investments.

Free and open markets persist in the U.S. but less so in Europe with the eurozone crisis. China will probably continue to control tightly her financial markets and currency, anathema for an international trading and reserve currency. Nevertheless, China is relaxing control of her currency slowly and the yuan has surpassed the Russian ruble and the Danish krone to become the world's 13th most used currency for international payments.

5. Lack of substitutes. A primary global currency, by definition, has no close competitors. The risk is that the top dog gets fat and lazy while upstarts surpass it in productivity growth, and ultimately, in GDP-per-capita or GDP-per-employee. That's how the Dutch lost out to the British in the late 1700s, and in turn, the U.K. was overrun by the U.S. a little more than a century later.

Today, the rigidly controlled Chinese economy and financial markets eliminate the yuan as a rival to the dollar for the foreseeable future. Export-dependent and inward-looking Japan does not want the yen to be a primary global currency. And the ongoing eurozone financial crisis and recession eliminate the euro for at least a number of years.

6. Credibility in the value of the currency. Internationally, money is fleet-footed, congenitally cautious and runs from uncertainty over risk of confiscation, debasement, etc., as discussed in our earlier review of history. The Roman aureus, the Byzantine solidus and the Arabian dinar all went out of international style when those empires waned, but the related debasement of those currencies speeded the exit. On the flip side, in World War I, Britain went off the gold standard only to return in 1925 with the prewar price of gold in sterling. With immense wartime inflation in the interim, that action vastly overpriced sterling, causing uncertainty and leading to a mass exodus of U.K. money to New York and elsewhere.

Credibility in the dollar has been strained by its overall decline since 1985 (Chart 11), but still is substantial. The troubling current account deficit will probably continue to shrink as retrenching consumers moderate imports, as discussed earlier, as U.S. production becomes increasingly competitive, and as net U.S. energy imports move toward exports. Also, in effect, competitive devaluations will ultimately be against the U.S. dollar. This will only add to the greenback's luster as the only safe haven currency of any size in a persistently uncertain world.


6. Energy Independence

America is on her way to self-sufficiency in energy. To the dismay of Peak Oil devotees, horizontal drilling and fracking technology have unlocked from shale oceans of natural gas and petroleum. Combined with the oil sands in Canada and other nonconventional sources of energy as well as higher auto fuel-efficiency and other conservation measures, there are predictions that the U.S. could be relatively free from foreign oil dependence by 2020. Cheap natural gas is a competitive advantage for U.S. producers, especially of petrochemicals and nitrogen fertilizers.

Leaping American oil and gas production has created a global energy supply cushion that allows the U.S. to deal with Iran and other trouble spots without debilitating spikes in oil prices.

John Mauldin

View the original article here

Friday, September 27, 2013

GARY SHILLING: Here Are 8 Reasons Why The US Will Be #1 For Years To Come

Shilling says a combination of demographics, education, the advantages of the dollar, and energy production will allow America to emerge from the current moment of economic uncertainty on top of the world.

By 2040, the U.S. ratio of working age to total population will be the highest for all developed nations, at 60.3%. And China's ratio is expected to fall to 63.1% from 72.4% in 2010.

We need to add 1.44 million jbs a year to keep our productivity growth rate at a steady 2.5%, Shilling says. BLS data indicates the working-age population will rise about 2.2 million a year. At a labor participation rate of 63.3%, we should be able to meet the 1.44 million figure.

America's education system is still better than anyone else's, not least because American students are encouraged to think more independently than their counterparts abroad. He also observes that for all its growth, much Chinese industry remains tied to "inefficient, state-owned enterprises."

Declining wages are bad for the individual worker, but on balance yield a more competitive labor force. Shilling notes that after getting bailed out, U.S. automakers were able to shift the pay rate for new workers to $14/hour, half that of veterans.

Americans have little choice but to save more. They no longer trust their stock portfolios to substitute for saving out of current income to educate their kids and finance early retirement.

As we consume less, foreign exporters will see fewer U.S. dollar flows, and America can regain some control over its own finances.

The dollar emerged from the recession largely unscathed, while China's and Japan's currencies face the same structural problems and Europe is still reeling. 

The U.S. can now flex its muscles in the Middle East without triggering an extreme spike in oil prices. 

Thursday, September 26, 2013

US process of deleveraging

The US is about five years into a process of deleveraging—the reduction of debt on its balance sheet—to make up for years of excess. My forecast is for another five years of unwinding the excess borrowing by banks worldwide, U.S. consumers and many other sectors.


Wednesday, September 25, 2013

Rapid US Growth Is Missing, Not Gone Forever

We are now about five years into the deleveraging, and the related slow global growth, that followed the 2008 financial crisis. My forecast is for another five years of unwinding the excess borrowing by banks worldwide, U.S. consumers and many other sectors.

The private sector deleveraging has been so severe that it overwhelms all the federal tax cuts and spending increases undertaken in response to the recession, as well as the central bank interest-rate cuts and quantitative easing that piled up immense excess member-bank reserves at the Federal Reserve.

If you need proof of the drag of deleveraging, look no further than the subpar 2.2 percent average real gross domestic product growth in the recovery that started in the second quarter of 2009 and the 1.7 percent growth in the second quarter of this year.

Most forecasters, however, initially thought that after the very deep 2007-2009 recession, the recovery would be equally robust. After all, that had been the norm. In the 15 quarters of this economic recovery, through the first quarter of this year, real GDP has risen 8.1 percent. Excluding the recovery after the 1980 recession that only lasted one year, the only other recovery this weak was the 7.5 percent gain after the 1973-1975 recession.

Most forecasters also yearned for the 3.7 percent average growth of the 1982 to 2000 salad days, when the economy was driven by declining inflation and falling interest rates as well as the consumer borrowing-and-spending binge that drove the household saving rate to about 1 percent from 12 percent in the early 1980s. Furthermore, that was an era of business restructuring, and as a result, stocks soared.

Nevertheless, as slow economic growth persisted in this recovery, many seers joined me in forecasting continuing slow growth rates of about 2 percent. They cited many of the causes discussed in my recent book, “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Among them are the shift by U.S. consumers from borrowing and spending to saving and financial deleveraging. This trend was compounded by the aging of the population, rising health-care costs, growing income inequality, high government debt and a faltering education system for many Americans.

Nevertheless, any phenomenon that lasts long enough generates theories that it will last forever. The average real GDP of just 2.2 percent since the recovery started, and of only 1.6 percent over the last 12 years, has spawned a number of such theories.

Harvard University economists Carmen Reinhart and Kenneth Rogoff, authors of the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” suggested in a 2010 paper that when central government debt exceeds 90 percent of GDP, the economy contracts at a 0.1 percent annual rate. Their findings became gospel.

In a 2011 speech to the Council on Foreign Relations in New York, the European Union Economic and Monetary Affairs Commissioner Olli Rehn said: “Carmen Reinhart and Kenneth Rogoff have coined the 90 percent rule. Huge debt levels can crowd out economic activity and entrepreneurial dynamism, and thus hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90 percent threshold, which the U.S. has already passed.”

I’ve argued that net debt, or borrowing from outsiders, is the important metric, not the gross amount that also includes borrowing and lending among government divisions. But let’s not quibble. Even on a net basis, U.S. federal government debt is almost 90 percent of GDP.

Glenn Hubbard, dean of the Columbia Business School and a former chairman of the Council of Economic Advisers, and Tim Kane, chief economist of the Hudson Institute, in their new book, “Balance: The Economics of Great Powers From Ancient Rome to Modern America,” express even more basic concerns. They say great powers fall into the trap of “denying the internal nature of stagnation, centralizing power and shortchanging the future to overspend on their present.”

They see “the storm clouds of history” gathering on the horizon because of the U.S.’s political inertia, anti-growth policies, the erosion of economic vigor and, especially, excess government spending.

Niall Ferguson, a Scottish historian who teaches at Harvard and is a fellow at the Hoover Institution, joins in with his new book, “The Great Degeneration.” He thinks government encroachment is strangling private initiative, especially in the U.S., threatening representative government, the free market, the rule of law and civil society. He focuses on the explosion of public debt in the U.S. as well as in Europe, the destruction of free markets by excessive regulation and the rule of law being replaced by the “rule of lawyers,” exemplified by complicated laws such as the 2,700-page first draft of the Dodd-Frank Act.

Ferguson worries that the U.S. civil society, with its many volunteer organizations that impressed Alexis de Tocqueville in the 1830s, is being replaced by the nanny state that promises cradle-to-grave security.

Then there’s Robert J. Gordon of Northwestern University who thinks that the big growth-driven technologies are fully exploited. He cites past marvels such as Thomas Edison’s electric light bulb (1879) and power station (1882), which led to other innovations, such as consumer appliances and elevators. He sees nothing to rival the economic impact of the automobile, the telephone, phonograph, motion pictures and radio, or the post-World War II developments such as TV, air conditioning, jet planes and the interstate highway system.

Computers and the Internet are essentially fully exploited, he says, and as a result, the 2 percent annual output growth per capita of the years from 1891 to 2007 are over. And with the retiring postwar baby boomers leaving the workforce, America’s lousy education system and growing income inequality, real yearly GDP growth of only 1 percent is likely and “the overwhelming majority of Americans will see their incomes grow just 0.5 percent annually.”

Some of these very negative arguments for future economic growth and structure have merit. Increased government regulation and involvement in major economies does stifle innovation and reduce efficiency and, therefore, economic growth. Then there’s the growing percentage of Americans who depend on government at some level for meaningful economic support -- from government civilian and military jobs to Social Security to food stamps recipients.

My company’s research shows that in 1950, 28.7 percent of Americans received meaningful financial support from the government. That share reached 52.4 percent in 1970 and jumped to 58.2 percent in 2007. As the retiring baby boomers draw Social Security and Medicare benefits, and with chronic high unemployment pushing government job-creation efforts, I see the total reaching 67.3 percent in 2018.

When more than half the population is receiving government aid, you might think there would be no end to the largesse they would demand at the ballot box. But that 50 percent level was breached by 1970, 43 years ago. The voters’ self-restraint reflects the U.S. character of deep-seated self-sufficiency. People apparently still believe that they can get further on their own merit than by pushing government to redistribute income in their favor.

None of the pessimists cited earlier expressed concerns about the growing role of finance in the economy in the past 20 years, which has occurred to the detriment of education and productivity-enhancement. Total stock market capitalization as a percentage of GDP traditionally ran 40 percent to 60 percent, but it exploded during the dot-com bubble in the 1990s, to 147 percent in the first quarter of 2000, exposing the degree to which speculation and dreams of quick riches had supplanted saving and serious investment. Investors told startups to burn through their capital as fast as possible to build name recognition, with no concern for profit prospects.

After the dot-com collapse, the ratio fell to 73 percent, still high. The housing bubble, another nonproductive investment area, propelled it to 109 percent in the second quarter of 2007. The housing collapse caused another decline, but the market capitalization-to-GDP ratio has since revived to 107 percent amid what I call the Grand Disconnect. Investors, at least until the last month or so, have had no concern for the reality of most economies, which are limping along at best, and were focused instead on the Fed pumping out money through quantitative easing.

The still-high ratio of stock market capitalization to GDP suggests that speculation remains preferable to productive work or investment. Many on Wall Street still seem to view it as an adversarial trading arena where the objective is to obtain money at the expense of others. Such get-rich-quick hopes aren’t new, but the idea that the financial sector exists to grease the wheels of commerce and not as an end in itself seems to have largely disappeared.

Another way of looking at the increasing role of finance for its own sake is the declining dollars of GDP associated with each dollar of new debt in the entire economy. Of course, this ratio, like any statistic, doesn’t prove causality. Nevertheless, in the 1947-1952 years, each new dollar in debt in the entire economy was associated with a $4.62 increase in GDP. Recently, that figure has dropped to 9 cents because derivatives and other layers of financing do little to promote economic growth.

Yet, even with all these caveats, I disagree with the long-term pessimists who, in this age of deleveraging and persistent slow growth, find increasing acceptance. I’ll discuss why I lean toward a return to rapid U.S. economic growth in the longer run in my next column.

(A. Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” This is the first in a three-part series. Read Part 2.)

Tuesday, September 24, 2013

GARY SHILLING: 7 Risk-Off Trades

Economist Gary Shilling has for sometime now said, that he expects the "Grand Disconnect between robust security markets and subdued-at-best economic reality," to close.

He believes the Fed taper could just be the shock that gets the ball rolling. Though the Fed still needs to clarify when it plans to begin tapering its monthly $85 billion bond buying program. 

The global economic outlook is mixed at best. On one hand growth is slowing in China, strikes might be coming to Syria, and tightening is coming to the Fed's easy monetary policy. On the other hand, Europe is emerging from a recession ane growth returning to Japan on the other.

In his latest Insights newsletter, Gary Shilling writes that their investment themes now "tilt toward risk-off."

Here are the main investment themes:

"Long Treasury bonds, but modestly. They've been beaten up, maybe too much so. Also, they serve as an anchor against a sudden Grand Disconnect-closing shock.""Short commodities in view of continuing declines in commodity prices as well as the slide in Chinese growth and the quenching of her thirst for commodity imports.""Long the dollar, the safe haven in a global sea of trouble."Short commodity-exporter currencies, especially the Australian dollar due to the vulnerability of that country's exports to flagging growth in China.""Short emerging market stocks and bonds. Those economies are export-led, and with slow U.S. and European growth, global export demand is weak. The Fed's impending tapering is forcing many developing lands to raise interest rates, to the detriment of their economies.""Short U.S. homebuilders. The housing market is too dependent on rentals, with first-time homebuyers absent. The one percentage point rise in 30-year fixed mortgage rates is starting to slow activity.""Short the U.S. stock market, but modestly."

Shilling publishes his report every month, and here's what changed from last time.

"Deleted: Long positions in utilities, consumer staples and health care in view of a possible sell-off in stocks.""Deleted: Short yen and long Japanese stocks. It's been a great run, but appears to be on hold for now, especially as global stocks weaken and the yen resumes its safe-haven role."

Shilling however continues to remain cautious and is advocating "heavy cash positions."

Monday, September 23, 2013

The US Economy: Always Look on the Bright Side… - Daily Reckoning - Australian Edition

'Americans have little choice but to save more. They no longer trust their stock portfolios as they did in the 1980s and 1990s to substitute for saving out of current income to educate their kids and finance early retirement.

'The nosedive in house prices after heavy cash-out refinancing of mortgages and home equity loans has removed much of the home equity they earlier used to finance oversized spending. The postwar babies have been notoriously poor savers and desperately need to keep working and save much more for their old age.

'As the saving rate rises, spending will grow more slowly, the reverse of what occurred when the saving rate slid from 12% in the early 1980s to 1%. That drove consumer spending growth about a half-percentage point per year faster than after-tax income and fueled the domestic economy.'

Monday, July 15, 2013

Gary Shilling position update 2013

With the fog still thick, we’ve raised cash by reducing our long positions on Treasury bonds and Japanese stocks and have cut our yen shorts. We’ve also reduced our short euro-currency exposure and dollar index long positions.

Our long positions on U.S. defensive stocks like utilities and health care remain intact but we’ve added to our short position on junk bonds and initiated shorts on emerging market stocks and bonds.”

Monday, July 8, 2013

Gary Shilling 5 Investment themes

Gary Shilling 5 Investment themes

1. Treasury bonds.

2. Investment-grade bonds and divined-rich stocks.

3. Consumer staples and food stocks.

4. Selected healthcare provider equities and direct ownership of medical office buildings.

5. The dollar, especially against the yen, euro, and the Australian dollar. Also long Japanese stocks.

Tuesday, July 2, 2013

Short stocks and commodities, long the dollar and Treasuries

Short stocks and commodities, long the dollar and Treasuries. Yes, the Fed’s recent statements mean Treasuries and other high-quality bonds have been trashed along with developed and developing country stocks, junk and emerging market bonds.

Nevertheless, if stocks continue to decline, the safety of Treasuries and investment-grade bonds will probably outweigh concerns about the end of quantitative easing. Then the “risk-off” quartet will be fully in place.