The year 2018 was pretty turbulent on the financial markets – and you think so Gary Shilling, so this can go very well in the year that just started, apart from short-term upward movements. The experienced chief and chief strategist of his own analytics and investment advice bureau makes several factors for a recession. Whether it concerns the fickleness on the world fairs, the expected reversal of the yield curve, the euphoria of consumers at the end of a long period of growth or the more restrictive monetary policy. "Twelve of the thirteen cases in which the US Federal Reserve (Fed) tried to cool an overheated economy since World War II ended in a recession," he says. The only exception was in the 1990s. Now the Fed not only increases its policy rate, as it has done for about 100 years in such cases, but also shortens the balance sheet. This has no experience so far.
As far as the determination of the date is concerned, a certain period of time will expire before the excess liquidity is recorded around the world. "But the US real estate market is already showing signs of slowdown." Firstly because interest rates would rise. Secondly, because they work with a lot of debt. The change in the monetary policy framework is rapidly becoming negative. "I see the leading indicators of the weakening of the OECD, see the low commodity prices, and I look at the subsequent review of published economic data – as opposed to a booming economy, they are now falling instead of up," the expert said further . Moreover, the difficulties of several emerging economies to cope with the burden of their high dollar debt and the impact of trade conflicts as the dollar gets stronger and interest rates rise.
Shilling ridicule the infamous optimism of most economists: "They are paid to spread the trust, I can sing a song myself because I was fired at Merrill Lynch after I predicted the 1969 recession, rather than the American economy. "He has doubts about references to the apparently robust earnings performance of the companies. The profit margins would decrease in the future for two reasons. Firstly, because the effects of Trump's tax cuts have expired. Secondly, there is an interaction between the share of the employee's salary and that of the company's profits in the generated output. The situation on the labor market was tense, the margins decreased when the wage earners demanded a larger share of the pie – and the analyst community had long since begun to lower its earnings expectations.
Among other things, the expert attributes the recent price sensitivity to a strange market structure. "Approximately 85% of total share trading is triggered by algorithmic or otherwise automated processes, which can reinforce each other and lead to correspondingly large price fluctuations downwards or even upwards", he explains and relates to the crash on 19 October 1987 Nowadays, the nervousness and the mobility of investors, who have come almost out of nowhere, have felt similar to those of the days when, after a fall of 23%, the wild price movements took place the following days.
The whole system is more focused on speculation than on the fundamentally oriented investment. "Share prices have risen about four times higher than the gross domestic product, as the Fed and the other central banks tried to use extreme monetary policy to create growth." The revival in the equity markets is mainly the result, while the real economy is rather weak Shilling continues. Although he does not make individual dangerous imbalances, but the investors have become very complacent, risks no longer perceive and speculate on credit. "We will only see where the problems lie when the whole thing has collapsed."
The market assumes that there will be hardly any further interest rate increases, and the question is sooner when interest rates would be reduced again. With regard to purchases of securities, they have hardly achieved anything in the past. If it happens again, some investors may be nervous about the huge deficits, he says. "Fed-chef Jerome Powell does not see his job as a saving on investors who have speculated, and I think it's good that the Fed is no longer run by one of those postdoctoral economists who are too focused on their models, rather than on the real world, "he says.
The dollar is a safe haven in the eyes of Shilling because of the lack of serious alternatives. He continues to rely on long-term US government bonds, the weak price response of which points to interest rate hikes & # 39; that huge deflationary forces must exist. He bets on investments in emerging markets and commodities. He regards Bitcoin as a fraudulent pyramid scheme.