A. Gary Shilling, the legendary American financial analyst and investment advisor, welcomes feedback on his much anticipated market forecasts – even when it’s less than flattering.
Take, for example, a recent piece of “fan mail” he received for a column he wrote for Bloomberg in mid-March Bloomberg entitled “A recession is coming, and maybe a bear market, too.”
The reader took issue with Mr. Shilling’s opinion, calling it a “self-fulfilling prophecy of less prosperity” that fuels economic doom and gloom. “Wouldn’t the larger community be better off if you kept your opinion to yourself?” the reader wrote in part of his letter to Mr. Shilling.
“That’s frameable,” says Mr. Shilling, president of Springfield, N.J.-based A. Gary Shilling & Co. Inc., and author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. “I wish I had that much influence on markets.”
Although Mr. Shilling may have his share of critics, he is widely respected for his work, including predicting the United States housing bubble that led to the financial crisis and ensuing Great Recession in 2008-09. His latest forecast is that there will be a global recession this year – and we may already be in it.
As for the market surge that investors have experienced so far this year, it’s a “bear-market rally” and not the next leg of a bull market, says Mr. Shilling. He’s being defensive in his portfolios, as a result.
Globe Advisor recently spoke with Mr. Shilling ahead of his keynote address at the Globe Advisor Forum on April 11, about his take on the markets and advice for fellow financial advisors on how to prepare clients for a potential downturn. (For a complimentary ticket to the Globe Advisor Forum, register here and enter the discount code Globe.)
You’re forecasting a recession. Explain why:
I forecast a recession will start this year. I give it a two-thirds probability. There are myriad signs that suggest the global economy is softening. It may be that we’re already in a recession. You never know that until months and quarters later, when all of the revisions are made and everybody analyzes the data. If we are going to have a recession, it’s already baked in the cake.
There is a possibility of a soft landing. We’ve only had one of those, by my count, in the post-Second World War period, which was in the mid-1990s. I define a soft landing as a time when the Federal Reserve Board raises interest rates, then cuts them, with no recession following. Until the Fed cuts interest rates, you don’t know if it has pulled off a soft landing. That could happen, but I think it’s less likely.
How are you managing your portfolios today to prepare for such an event?
We are long on U.S. treasuries because they are a safe haven. In a recession, credit demand declines and inflation declines, both of which favour treasuries. We are also long on the U.S. dollar, which again is a safe haven. As for stocks, we are invested in defensive areas such as health care, utilities and consumer staples. We aren’t stock pickers, though. We’re top-down, macro-oriented. We use broad indices and exchange-traded funds in our portfolios. We advocate for a “buy and hold” strategy. It works, if people do it. The reality is, most people don’t.
What’s your take on commodities?
I think commodities are probably at risk. They always are in a recession. By commodities, I mean things such as copper, aluminum, zinc and iron ore – a lot of stuff that Canada produces. Oil is its own world. It’s tough to call. You don’t know what Russia and OPEC will do. I’m agnostic on gold. It has so many forces that can push prices around.
How should advisors best prepare their clients for what’s to come, based on your forecast?
You have to tell people to prepare for downside risk. We had a long bull market. It started in the U.S. in March of 2009, fuelled by quantitative easing. That ran out last year. The benefit of [central bank] largesse is over. Looking ahead, people have to be more realistic about what they can expect.
That said, you don’t want investors to panic. Recessions are pauses in upward growth in the economy … [They] can be very scary and very few people really do have a long-term perspective, particularly when things look like they’re falling apart. I think good advice is, ‘Take some money off the table. Go to defensive positions. Prepare yourself for a possible risk on the downside.’
This interview has been edited and condensed