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Shilling: Lengthy Deflation Ahead

By Julie Crawshaw   |   Tuesday, 17 Mar 2009 10:48 AM

Perennial bear market guru Gary Shilling says deflation lies ahead.

Shilling believes price drops of 2 percent to 3 percent yearly will persist long after this recession because of huge efficiencies driven by globalization and technology, echoing similar deflationary periods during prosperous, high-growth times like the late 1800s and the 1920s.

"People say I'm always negative, and when I'm right, it's like the stopped clock being right twice a day," Shilling told The Wall Street Journal.

Believe him or not, here’s his advice to investors:

Don't expect your house's worth to rebound. Stash your money in apartment real-estate trusts and longer-term, conventional Treasurys and certificates of deposit, which will continue to pay interest in the low single-digits.

Companies dedicated to containing costs, like pharmacy-benefit managers, are also good bets.

Avoid buying shares in debt-heavy companies or inflation-protected Treasurys.

The housing bust is showing Americans that a place to live is no longer a can't-lose investment, Shilling notes, plus retirement-panicked baby boomers are pulling back on purchasing, electing to save instead.

If the consumer price index is down 2 percent and 30-year Treasurys yield 3.6 percent, as they do now, investors are effectively making 5.6 percent, he points out.

Nobel prize winning economist Paul Krugman concurs with Shilling’s outlook.

“There is really quite a significant risk that we will enter a period of deflation within a year or two,” Krugman said during a recent conference in Madrid.

“This is correct for the United States, it could be correct for Europe.”

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Perennial bear market guru Gary Shilling says deflation lies ahead.Shilling believes price drops of 2 percent to 3 percent yearly will persist long after this recession because of huge efficiencies driven by globalization and technology, echoing similar deflationary periods...
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