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(Jonathan Alcorn)
(Jonathan Alcorn)

Inside the Market

Q&A: Gary Shilling on why the latest rush into stocks will end miserably Add to ...

Last week, we asked our readers to submit questions for Gary Shilling, one of the world's best-known economists and money managers. We selected 10 of these and posed them to him.

Mr. Shilling may be one of the last big-name bears standing - and he didn't disappoint on his downbeat outlook for markets and global economies. What follows are his views on everything from stock markets (get ready for a big correction), U.S. housing (forget about any price recovery) and how to invest (ditch high yield in favour of secure corporate bonds).

More Related to this Story

Next week, we'll return with our weekly live investing chat at Inside the Market, at 1 p.m. (ET).

The S&P has already reached the highest level since 2009. Do you see it going higher from here, or see it cooling down a little bit?  -- Neil Godeum Suh, Winnipeg

Right now we’re in what I call the grand disconnect. The economies of the world are growing slowly, if at all. The euro zone is in recession, the U.K. is in recession, Japan is in recession, China’s growth has slowed, and U.S. growth is not all that robust. But investors couldn’t care less. All they are concerned about is the money being shoveled out the door by central banks. And I call that the grand disconnect between the real economy and investors’ view of the world.

On top of that, there’s this zeal for yield: low interest rates engineered by central banks have encouraged people to go after the junkiest of the junk. The lowest credit rating investment vehicles, junk bonds, emerging markets bonds and the like. They couldn’t care less about the risk - all they care about is yield. The combination of these factors gives us what is clearly a risk-on position.

As long as this grand disconnect and zeal for yield persists, we’re probably going to see more of the same. And there’s some feeling now that, when looking at the near-trivial returns on junk bonds and other low-grade fixed income investments, people are saying ‘gee, maybe I better go for equities instead.’ So I think as long as this grand disconnect and zeal for field persists we’re probably going to see higher stock prices.

It’s a very unsubstantiated grand disconnect and I think sooner or later it will be eliminated by some big shock. I don’t know the timing of that, but it could be like a big spike in oil prices because of problems in the Middle East. It could be Washington not dealing with the postponed fiscal cliff…

I think it could (be this year) but forecasting big shocks like this is obviously difficult. It’s in the cards, it’s just a question of when it will happen. But things are getting very frothy. For example, 46 per cent of junk bonds in the US are selling at or above call. In other words, they are selling at or a higher price at which the issuers can call them back and regain them. Well that normally doesn’t happen because the assumption is they will be redeemed. It just shows the frothy nature and this is very speculative, very bubble-like in many areas.

Q: What is the outlook you have for Canada, as we are a resource rich country? Are we seeing a new chapter of trade and diversification into Europe and Asia? -- Candace Bower of Vancouver, and John Bourassa of Red Deer, Alberta.

Canada is a commodity country. …  This makes it very susceptible to commodity prices globally and the reality is that this depends on two things: the pace of exports to the major buyers of other people's goods and services, and that’s the U.S. and Europe. And the other is China, which is manufacturing most of these goods that are getting exported. …

I think ultimately the bet on Canada really depends on what’s happening in the U.S., Europe and China. I don’t think the outlook there is all that rosy. China is definitely trying to shift away from an export-oriented economy to a more domestically driven one. Europe is in a serious recession and the U.S. is distinctly subpar.

I think we’re going to find the Canadian economy subdued by these dramatic disorders. Having said that, Canada has done a much better job  than the U.S. in the earlier period, and didn’t have the excesses and consequently didn’t have such a huge financial crisis…but I don’t think that makes Canada invulnerable to global forces because it is a much exposed economy due to its commodity and export driven nature.

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