Monday, February 26, 2018

On Donald Trump - Interview part 2

Gary Shilling talks to ThinkAdvisor on President Donald Trump and his effect on the people and stock market.

What are the chief positives of President Trump’s tax package?

The cuts, kind of, even up the playing field in the corporate area. They don’t really do much net-net in the individual area. They front-loaded them, with the idea of spurring the economy. But it was a political game — we’ve got an election coming up this fall. However, there was serious need in the corporate area for updating in a globalized world. We had a 35% tax rate, and now it’s 21%. Amazon and Microsoft and [other companies] had cash stashed overseas.

Why will the cuts have little effect on individuals?

There’s an effect in the next year or two because they’re front-loaded. But then that’s basically taken away in the succeeding years. So it may spur incomes in the next year or two, but that fades over time.

Will people start spending more?

Higher-end people don’t adjust their spending when their incomes or assets go up and down. But with more money in their hands, middle- and lower-income people tend to spend. So I think that whatever increases they get in income will probably go to rebuilding their savings, particularly baby boomers, who have been notoriously poor savers throughout their entire lifespan.

How much do you credit Trump for the stock market’s record-setting performance?

Some things that Trump has accomplished suggest that he has had a measurable impact on stocks. The most important one is deregulation. That’s his biggest accomplishment. Deregulation isn’t dramatic. [I mean], there’s no Rose Garden signing ceremony for deregulation. It’s a little of this, a little of that. It’s putting different people in charge. It’s either ignoring regulations that they want to avoid or changing them.


Tuesday, February 20, 2018

The Fed is comprised of mostly academics

Globalization has helped some countries and hurt others. The US Federal Reserve seems not to understand some of its effects on its common citizens.

"The Fed is misreading reality for a whole host of reasons. One of the biggest is globalization. They’re very much in a domestic world and don’t realize the power of what globalization has done to manufacturing, how it’s decimated unions in this county, what it’s doing to the service areas, where companies are outsourcing legal and accounting work to India. The Fed is oblivious to all that."

"My view is that there aren’t many people there who have ever met a payroll — never had the responsibility for running a business and paying people. Almost all of them are academics or people who have spent their whole career in the regulatory area or in government agencies. "

via thinkadvisor

Wednesday, February 14, 2018

Gary Shilling: India VS China economy

Gary Shilling praises India as having good long term prospects, even more so than China.

"One that we’ve been very optimistic about is India, though it’s better known today than it was six years ago, when we first got enthusiastic about it. I wrote a report back then that India was a better bet in the long run than China. It’s a long-term play and still has a lot to go.

It has a lot of advantages: It’s a democracy, albeit a messy one — there’s a lot of graft and corruption — but it’s a democracy. China is a top-down dictatorship and is becoming more so. The world is pretty much saturated with manufactured goods now; and as economies grow, a greater portion of spending is on services. India is much more into services — software and so on. They’ve got a knack for it. And India has large private corporations. In China, they’re basically state-controlled and very inefficient."

Monday, February 12, 2018

Gary Shilling interview on the stock market - Part 1

Gary Shilling talks with ThinkAdvisor on the markets 

THINKADVISOR: Are you bullish about the market?

SHILLING: No, I’m not rampantly bullish. Stocks are expensive. The economy is getting long in the tooth. There’s reason for caution. But by the same token, I don’t see the party coming to a grinding halt in the immediate future.

THINKADVISOR: When we talked last July, you said the biggest threat to the market was complacency. Is it still?

SHILLING: Yes. It’s very much there. When you see this mad rush into index funds — passive investments — the attitude is: “I don’t care what the fundamentals are. I’m buying it because it’s going up.” So it’s onward and upward with no discrimination. The other manifestation is speculation — the same kind of speculative complacency we’ve seen in the Bitcoin area.

THINKADVISOR: What’s the stock market’s tipping point?

SHILLING: Good question. Historically, bull markets haven’t died of old age. There’s always some trigger mechanism. In the post-World War II period, they’ve come from two sources. One is that the Federal Reserve worries about an overheating economy and tightens up credit. By my reckoning, in 11 out of 12 tries, that has precipitated a recession. The only soft landing was in the mid-90s.


Thursday, February 1, 2018

In the past most rate hikes have led to a recession

Gary Shilling is out with his latest views, in which he discusses the changeover in the leadership of the US Fed from Janet Yellen to Jerome Powell. Also includes thoughts on why the Fed raised interest rates and how it may affect the markets. Read the column below.

With the pickup in global economic growth, central banks -- except for Japan’s -- are shifting to tightening from extremely easy money, including massive quantitative easing and trivial, if not negative, short-term interest rates. The Federal Reserve has raised its target for the federal funds rate five times since December 2015 and is suggesting three more increases this year.

But the Fed is confronted with a serious dilemma: Inflation and wage increases continue to undershoot its expectations at the same time the central bank confronts forces pressuring it toward credit tightening. 

The new chairman, Jerome Powell, who isn’t a trained economist, may change the central bank’s tone, but his soon-to-be predecessor Janet Yellen and the other academic economists who have dominated monetary policy, believe fervently in the theoretical Phillips Curve. It posits that a declining unemployment rate should spur inflation, despite evidence to the contrary. Rather than increase as the unemployment rate declined since the recession, the rate of inflation has largely stayed the same.

Nevertheless, the Fed wants to tighten credit slowly due to chronic low inflation and memories of the May 2013 “taper tantrum,” when a mere mention by then-Chairman Ben Bernanke of reducing the Fed’s rate of asset purchases sent financial markets into tailspins as interest rates leaped. 

Another reason for the Fed to tighten is to keep commercial banks from lending out the more than $2 trillion in excess reserves the Fed has given them through quantitative easing. These are simply an asset of the banks and a liability on the Fed balance sheet with little financial or economic consequences. But as economic growth picks up as a result of the tax cuts followed by likely massive fiscal stimulus, creditworthy borrowers will want to borrow, banks will be happy to lend and these excess reserves could turn into tons of money that would threaten major inflation.

The Fed is also concerned about market distortions caused by low rates. The problem isn’t low rates, per se, but investors' unwillingness to accept them despite the offsetting effects of low inflation. Adjusted for inflation, the 30-year Treasury bond yields 0.62 percent, lower than the 1.7 percent average of the last decade but not hugely so. Nevertheless, many investors and savers believe they deserve much higher returns than the 2.97 percent current yield on the 30-year Treasury and 2.73 percent on the 10-year note. So they’ve moved further out on the risk spectrum into assets such as  emerging-market bonds, student debts despite high delinquency rates and leveraged loans, to name but a few.

Fed officials, while they believe that in a normal, stable economy, the fed funds rate should be around 3 percent compared to the present 1.25 percent to 1.5 percent range, are also gradually adjusting to reality. They’re suggesting that it may be appropriate for rates to be lower for longer.

I remain convinced that a key reason the Fed has raised rates is because its credibility was at stake, and remains so. It has repeatedly forecast higher fed funds rates than it subsequently initiated. Bear in mind that the Fed controls that rate so it simply didn’t do what it intended. The gap between its fed funds forecasts and actions are extraordinarily wide, ranging to more than four percentage points.

Despite Powell's suggestion that the economy has not run out of slack, the majority of policy makers may worry that the tax cuts could prove stimulative enough to cause major economic strains. In addition, Republican plans for major infrastructure outlays will no doubt concern the Fed about an overheated economy. And that’s despite the likelihood that the actual spending won’t take place for several years.

Historically, once the Fed starts to raise rates it almost always continues until it precipitates a recession and a bear market in stocks. By my count, in 11 of 12 times since World War II, a recession followed a rate-raising campaign, though it can often take years for that to happen. The only soft landing was in the mid-1990s. This time, with so much excess liquidity around the world, it may also take years before higher rates and a reduction in the Fed’s balance sheet assets start to pinch the economy.

The yield curve -- the spread between short- and long-term Treasury rates -- may also behave differently this time. In the past, when the Fed jacked up rates to the point that yields on 2-year Treasuries exceeded those on 10-year notes, the yield curve “inverted” and a recession followed. Inversions typically occurred because 2-year yields rose faster than 10-year yields. Recently, however, the spread has narrowed because 2-year yields have risen but 10-year yields have been relatively stable. That’s unusual but probably reflects deflationary pressures that are more evident in longer maturities.

So, if an inverted yield curve occurs, it may not, as in the past, guarantee a nearby recession, and it may take years before Fed tightening precipitates one.