Long-time market observer and author Gary Shilling was on Bloomberg commenting on Fed chairman Ben Bernanke’s recent testimony on the economy and problems he sees ahead.
Shilling said he expects further weakness in employment as we are probably in a recession right now. He added that retail sales were negative for three consecutive quarters (he meant months). Shilling explained this has happened 27 times since 1947 and in 25 of those instances the economy was in recession, or three months from a recession.
Shilling said this recession is unusual because it is due to consumer retrenchment, whereas in the post-world period recessions are usually caused by the Fed tightening because the economy is overheating.
Bloomberg host Mark Crumpton asked Shilling whether the Fed’s focus should be on jobs or inflation. Shilling responded jobs should be the priority because deflation is more likely than inflation. The problem is the Fed is pushing on a string and there’s not much they can do to help the economy, he added. Lower interest rates with the 10-year note under 1.5% and the 30-year at 2.6% (Shilling believes they’re going lower still) isn’t doing much for the economy he explained.
One thing that isn’t getting much attention is that for the people who receive interest, including pension funds and individuals, the low rates are having incredible distorting effects, said Shilling. Pension funds are moving out on the risk curve looking for better performance.
Shilling said the California Public Employees’ Retirement System (CalPERS) just reported a return of 1% for their fiscal year that ended in June and knocked their target down from 7 3/4% to 7 1/2%; they’re way under that. They’re moving out on the risk curve with private equity, real estate, hedge funds and so on. Shilling sees continued deleveraging and low rates for another 5-7 years which is going to cause a re-structuring for those who receive interest.
The interview continued with Shilling commenting on Ben Bernanke’s performance (A- or B+ by Shilling’s estimation) and whether the consumer was tapped out.