Wednesday, August 12, 2009 0 comments

How does a deflationary USA look like?

Gary Shilling had been forecasting deflation for many years. He was wrong most of the time but it appears he may finally be right. It's still not certain—consensus, as well as many superinvestors, seem to take an opposite view—but deflation does look highly probable.

In one of his Outside the Box pieces, John Mauldin extracts Gary Shilling's latest newsletter, which deals with Shilling's US forecast for the next decade. Shilling expects 2% real GDP growth from 2008 to 2018. This compares with 3.6% GDP growth rate from 1982 to 2008 and arough 1% in Japan from 1990 onwards. Shilling is in the deflation camp and expects general decline in prices (although this article doesn't deal that topic in detail.)

Since I was already leaning towards the deflation camp, a lot of the projections are not surprising to me. But one thing did stand out for me. Who knows how correct Gary Shilling will be but his forecast for US exports and imports is kind of scary. He is forecasting exports and imports of 3% and 2.8%, respectively, for the 2008 to 2018 period. This contrasts with 7.4% and 9%, exports and imports, respectively, in the 1982 to 2008 period. That is a massive decline. When you think about how the US economy is the largest in the world, that decline will have massive repercussions all over the world. I would urge everyone that is concerned with deflation to be careful with export-oriented emerging markets, trade-oriented companies, and US companies that depend heavily on trade. His view, which is similar to mine, basically calls for the end of the world trade boom.

If anyone is interested in the economic picture of a deflationist, check out the article here. If the link doesn't work (not sure if one needs to register), you can get it from Edward Harrison's Credit Writedowns as well. This is all pure macro stuff so if you are bottom-up, you may not find anything useful (Shilling says he will describe potential investments in a future letter but since the letter is not free, I don't think I'll find out for a while.)

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