Gary Shilling's Investment Strategies for 2011

Posted Jan 20th 2011 5:00PM by Gary Shilling
Filed under: China

Editors note: Economist Gary Shilling has agreed to share with BloggingStocks his 18 investment strategies for 2011. But he will only be revealing them a little at a time, over the next few weeks, so check back often!

My investment strategies for 2011 are driven by my forecasts for the economies and financial markets here and abroad. In my view, the overarching reality that will dominate 2011 and, indeed, the next decade or so is financial deleveraging, as spelled out in my new book, The Age of Deleveraging: Investment strategies for a decade of slow growth and deflation, which was published in November 2010 by John Wiley & Sons.

I look for slow U.S. economic growth of 2% or less this year. The post-recession inventory bounce is over. Consumers are probably more interested in saving and repaying debt than in spending. State and local government spending and payrolls are falling. Excess capacity will retard capital equipment spending while low rents curtail commercial real estate construction. Economic growth abroad is unlikely to kindle a major export boom. Housing is overburdened with excess inventories. QE2 will be no more effective than QE1 in spurring lending and economic growth, while net fiscal stimuli will decline $100 billion in 2011 compared with 2010.

With slow growth, only a moderate shock will initiate a recession. Candidates include the deepening eurozone crisis, a hard landing in China, and the 20% further drop in house prices I expect over the next several years. That would push underwater mortgages to 40% and hype strategic defaults while severely damaging consumer spending and the economy.

In this environment, I have developed 18 investment strategies for 2011-nine on the buy side and nine on the sell side. Over the coming weeks, I will outline them here, a few at a time.

Buy Treasury Bonds

My most profitable investment, I expect further substantial appreciation with 30-year Treasury bonds. So few other investors believe my forecast has any chance of being realized. But, fundamentally, I favor Treasury bonds ...

Because we foresee slow economic growth at best in coming quarters and years
Because the Fed is determined to further reduce interest rates
Because deflation is looming
Because long Treasury bonds are attractive to pension funds and life insurers that want to match their long-term liabilities with similar maturity assets
Because as the U.S. moves ever closer to the slow growth and deflation of Japan, the parallel trends in government bond yields seem likely to persist
Because Treasurys are the safe haven in a sea of trouble in the eurozone and elsewhere
Because China's attempts to cool her economy will probably precipitate a hard landing
Because the likely price appreciation in Treasurys is in stark contrast to expensive stocks and overblown and vulnerable commodities, foreign currencies, junk securities and emerging market stocks and bonds.

I continue to predict that 30-year Treasurys, "the Long Bond," will rally from its current yield of about 4.5% to 3% with appreciation of around 2.6%. Similarly, a 30-year zero-coupon Treasury would gain 48%. I also expect the 10-year Treasury note yield to drop from the present 3.3% level to 2.0%. but the appreciation would be only 11%, largely because of its shorter maturity.

Buy Selected Income-Producing Securities

This includes the high-quality corporate bonds although their spreads vs. Treasurys narrowed to 1.7 percentage points in 2010 through November from 2.1 in 2009 and 6.3 in 2008. I also continue to favor stocks of utilities, consumer product companies, health care firms, and others that pay meaningful dividends that are safe and likely to rise.

After a long hiatus, companies that pay substantial, predictable, and meaningful dividends may be coming back into style for two distinct reasons. First, in a post-Enron/Arthur Andersen world and after gigantic write-downs have made reported earnings for many companies questionable, a company paying meaningful dividends is, in essence, assuring investors that it is generating the real earnings and real cash flow needed to finance those dividend checks.

Furthermore, a significant dividend-payer will almost certainly continue to be run in a prudent and stable manner. Dividend cuts forced by the down phases of volatile earnings patterns are not loved by investors, as was shown when many financial institutions slashed or eliminated their dividend in 2008. Second, dividends may provide the lion's share of earnings for many companies in future years, as I discuss in The Age of Deleveraging.

Stay tuned for more investing ideas from Gary Shilling.

A. Gary Shilling is president of A. Gary Shilling & Co, publishes Insight and is the author of The Age of Deleveraging.