Tuesday, December 01, 2009

The Voyage Continues

By Vahan Janjigian - Gary Shilling gave his talk today while we continued our voyage toward St. Croix. Gary said we will not have a V-shaped recovery as many economists expect. He talked about how household net worth has plummeted due largely to the sell-offs in stocks and residential real estate. Gary also explained that corporations are cutting wages and forcing employees to take unpaid furloughs. He says this is the first time since the 1930s that this has happened on such a large scale. Furthermore, not only has unemployment risen, but it has also become much more difficult to find a new job. Gary expects slow economic growth for several years. He projects annual growth of 2.1% for the decade ending in 2018. However, he claims that 3.3% annual growth is needed just to keep the unemployment rate constant. As a result, he expects to see the government taking much more aggressive actions in order to try to create jobs. He advised investors to stick to Treasury securities and dividend paying stocks.

There was some discussion about whether investors needed to worry more about deflation or inflation. Both Gary and I relied on the same graph that showed how capacity utilization has fallen to explain why the Fed is not worried about inflation. You do not typically see much inflation when capacity utilization is so low. Nonetheless, in my presentation, I argued that the Fed should start raising interest rates right away. A quarter-point increase in the fed funds rate will not do anything to slow economic growth, but it would send a strong signal to investors that the Fed actually believes its claim that the economy is getting better. It would also help strengthen the dollar and turn investors away from commodities such as gold and oil. By keeping rates so low, the Fed is creating another bubble in commodities.