Book Review: “The Age of Deleveraging”, a tome by A. Gary Shilling

I heard Gary Shilling speak at a conference last month and his discussion of demographics was interesting and insightful so I sought out his most recent book: “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation”. This book was 500 pages long. Five hundred. I told B. I felt like I was taking a graduate level course in economic forecasting. I’m not even sure how to integrate this book into my body of knowledge, but here’s my attempt.

The first 125 pages or so are on the subject of why we should listen to him. Each chapter is about triumphs in prognostication he had over the years, his “Seven Great Calls” when he predicted major economic changes. I found the history to be occasionally interesting and skimmed the chapters looking for what he considered the markers of change. The main thing he appears to do is to really dive down into the STORY that the economic indicators are telling. Look at the big picture: where are the demographics? What is the existing inventory level? What makes SENSE to happen next? I found his methods to be plausible and in line with the way I look at the world, too. Each of the many threads emerges into a tapestry if you stand back and look at the big picture. This is why I read so many threads and go for long walks to let it gel. I’m not Gary Shilling, but I don’t have to be if I can listen to people who see the big picture.

The central premise of this book is that Gary Shilling sees slow growth ahead. Period. He stands with Mish Shedlock in the deflation camp (although he never mentioned Mish Shedlock.) Instead, he takes on more esteemed heroes of mine. He pooh poohs Peak Oil (we’ll switch to natural gas, he says, and doesn’t sound cornucopian when HE says it.) He dismisses Milton Friedman’s definition of inflation “as always and everwhere a result of excess money.” What is money, asks Shilling? If you have a $10,000 credit line on a credit card – whether you use it or not – isn’t that money? American Express cards have no limits on them… what does THAT mean to the money supply? Instead he talks about there being seven varieties of inflation/deflation:

1. Commodity
2. Wage-price
3. Financial asset
4. Tangible asset
5. Currency
6. Inflation by fiat
7. Goods and services.

I have to admit, I really liked having seven dimensions to this issue. It is far more satisfying that Friedman/Martenson/Austrian versions. It fits reality better. It’s hard to hold them all in my head at once, and they often move in tandem, but they actually are NOT identical and our current world situation has allowed the effects of different parts to be teased out better. If I ever re-read this book it’ll be for Chapter 8: “Chronic Worldwide Deflation”. This is where he makes the case that he isn’t just some cranky old man moaning about how things were better when he was young (and get off my lawn, kid!)

Chapter 9 talks a bit about what help we can expect from the Fed, IMF and Congress. It’s a short chapter. (Synopsis: none.)

Chapter 10 is about the outlook for stocks. The short version there is that he expects very low earnings going forward. He pretty much stayed away from the question of whether to buy index funds or managed portfolios in a confusing way, by saying managed portfolios will do better, except most of the time they don’t. He is not a fan of long-term buy and hold and hates asset reallocation strategies, too, thinking it’s foolish to sell your winners to buy your losers. Far better to just buy winners low and sell them high. (D’oh, why didn’t *I* think of that?) So, all in all, this chapter was pretty worthless to me. (Because every book that says, “first, start by buying a high quality stock cheap right before it goes up” is similarly worthless, although is certainly fine advice.)

Chapter 11 was his explanation of twelve investments to sell or avoid. This is worth elaborating on:

1. Big Ticket consumer purchases (because people will be more austere and expect prices to fall so they’ll wait to buy.)
2. Consumer lenders (who are about to find out that “deleveraging” means that they don’t get paid back)
3. Conventional home builders (demographics suck)
4. Collectibles (there’s a distinct shortage of greater fools)
5. Banks (see #2)
6. Junk securities (did you notice how the lenders faired in #2 and #5)
7. Flailing companies (uh, when WERE those a good idea?)
8. Low tech equipment producers (becoming obsolete and fungible at the same time)
9. Commercial real estate (low growth = high vacancies)
10. Commodities (they’re being played by speculators)
11. Chinese and other developing country stock and bonds and
12. Japanese securities.

Japanese securities were because Japan is a stagnant aging population with a serious debt problem whose heroes all die in kabuki plays (or something like that.) But the Chinese and other developing country stocks and bonds was because of currency risk and because the economy is still too dependent on exports to the First World. Until a country develops a sizeable middle class that can purchase its own GDP the economy is too tied to ours, he claims, and so you just end up with the currency risk that will eat up any growth. He also thinks that China has been stimulating itself into creating too much capacity that they aren’t yet using. In other words, he’s expecting deflation there, too.

Instead, he suggests you buy:

1. Treasuries and other high-quality bonds. (This guy loves him some long bonds. He had a unique voice on that subject and I should probably reread this section because I find myself really confused how the Long Bond could be a good investment in a 0% world. He appears to be expecting the interest rate to go still lower!)
2. Income-producing securities (sort of the opposite to #7 above, I mean, duh.)
3. Food and other consumer staples (because they won’t be subject to people putting off buying them.)
4. Small luxuries (fluffy toilet paper? Watches? Cosmetics?)
5. The U.S. dollar (he made the case that no one else has anything better.)
6. Investment advisers and financial planners (Wuhoo! He makes a case that we’re worth our keep.)
7. Factory-built housing and rental apartments (so, buy those REITS but make sure they aren’t commercial, merely residential housing. Uh, good luck with that.)
8. Health care. (Demographics, government unicorn funding, the thing people want above all else)
9. Productivity enhancers (because everyone wants to run their business without actual people)
10. North American energy (because we’re massive hogs who care not one whit about climate change and want our air conditioning RIGHT THIS MINUTE without having to negogiate with Iran for oil. Sounds like a solid bet to me.)

The pieces I find myself thinking about in new ways are 30 year treasury bonds (it comes as a surprise to me that someone LIKES those) and that emerging country growth won’t be as solid a play as I was thinking. He also gave me some instruction on how to think about the Big Picture, and my brain may be ready for more on that subject after I rest up from reading this book. It was tough going at times, and he occasionally veered into stories about his days meeting with captains of industry or highly placed officials. I guess he’s allowed. He’s pretty proud of the job he did replumbing the house he bought in 1968 and still lives in. I found myself liking the man, much the way I like Jack Bogle and Bud Hebeler. Overall, recommended, but be prepared to skim some parts.

Originally published August 20, 2012 at