Gary Shilling: Making the Case for Recession

Larry Kudlow interviews Gary Shilling on CNBC's Kudlow and Company
May 15, 2012

Kudlow: Let's switch to an entirely different discussion. I know there is a lot of optimism about stocks and jobs and the economy. Our next guest, however, is going to rain on this parade. Joining me is my great friend Gary Shilling, President of A. Gary Shilling & Company and author of The Age of Deleveraging. You still are in the recession camp?

Shilling: Let me say before I answer it, the reason the money supply is going up is because people are switching their funds into forms that count as M2 and out of other forms and they are doing it for safety -- they want FDIC insurance. We've studied that in detail.

Kudlow: So it's deflationary

Shilling: It's deflationary, it's not inflationary. It's safety. It's not money that is waiting to be spent, to be invested. It's quit the opposite.

Kudlow: I don't necessarily disagree with all this. But, C&I loans are rising at a about 10 percent year on year, as it the money supply. Is that now a --

Shilling: If you look at total bank loans and leases, they continue to be flat, Larry. You can pick and choose, but if you look at the totality of what bank's are doing, it literally is flat. It's going nowhere. If you look at banks, this is the age of deleveraging. Look at what banks are doing. They're selling off assets. They're closing offices. They're cutting down. They need to improve their equity, reduce their leverage. The stocks are so low that they don't want to issue new equity and dilute shareholders.  So, they bascially are trimming assets.

Kudlow: And despite better job performance, you still are worried about consumer spending and income?

Shilling: Well, I am, because we haven't seen that in income. And if  you look at the jobs, a lot of those were low paying jobs. Medical. Now you and I say physicians. Look at what they get be paid. But most medical jobs are people changing bedpans in nursing homes and things like that.

Kudlow: Oh. OK.

Shilling. If you look at the hospitality industry, those are waiters, those are bus boys and those are people flipping hamburgers at McDonald's. If you look at where the most job growth is coming, it's in the very low income area. And we certainly have not seen it.  And, look at what consumers did in December. Their after-tax income, their disposable personal income, was up half a percent. And, guess what, they saved it all. December looks like the end of that spending spree that started last fall. People bought their Christmas presents starting in October. Retailers were cutting prices because they were worried about excess inventories. It pullled the sales forward. I think going in to January it is going to be fairly weak.

Kudlow: You make a strong case. I am not in your camp, but you make a strong case, as you always do. Lastly question, Gary. What are your investment implications of this relatively pessimistic scenario?

Shilling: Last year we had 19 investment recommendations and 15 of 19 worked. We carried over a lot. I like long Treasuries. I think we are headed for 2.5 percent on a 30-year bon. It's now 3 percent. that gives you 12 percent appreciation.

Kudlow: No stocks?

Shilling: I do like stocks. I like for example pipeline stocks. That's our way of saying North American energy. The gas prices are going down but they are still going to drill. They lose their leases if they don't. They want the natural gas liquid, so they have to build the pipelines to get the stuff out.

Kudlow: Somebody. Maybe not Keystone.

Shilling: I like utilities. In other words, people want income here and now. They don't want capital gains out in the wild blue yonder. Stocks have gone nowheres. The S and P 500 has gone nowhwere since 1998. They are saying hey, I want the money now. I think consumer staples. People need to eat

Kudlow: Bonds, dividend payers and constumer staples.

Gary: I have others -- but we are running out time.

Kudlow: -- for the next time. Gary Shilling, thank you for being here. That was realism. That's why I wanted to get Gary involved because he has a great track record.

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