Gary Shilling Expects Great Disconnect to Cause Stock Market Crash 2013

Stock-Markets / Financial Crash Jan 28, 2013 - 06:20 PM GMT

Steve Sjuggerud writes: Gary Shilling might have the best track record of any investor over the last 30 years...

If you had invested $100,000 in Shilling's "big idea" 30 years ago, it would be worth over $6 million today.

While most investors didn't pay attention to his big idea, Shilling was right. And he never gave up on his big idea.

Here in 2013, Shilling has some new big ideas... and some bold predictions... particularly about what he calls the "Grand Disconnect."

Thirty years ago, Shilling's big idea was that inflation would go away. He made this prediction in the early 1980s, when inflation was double digits.

He put his money where his mouth was... and put clients into the one particular investment that would profit the most (long-dated zero-coupon U.S. Treasurys). Shilling's strategy of rolling money every year into the longest-dated Treasurys paid out 60-fold returns.

Stocks and gold couldn't compete at all with Shilling's strategy over that time... $100,000 invested in gold turned into $400,000, and $100,000 invested in stocks turned into $2.1 million. Shilling's recommendation beat both of those by $4 million.

Last week, Shilling spoke with Canada's Globe and Mail newspaper.

He explained his big idea today – he explained the "Grand Disconnect"...

Right now we're in what I call The Grand Disconnect... The economies of the world are growing slowly... But investors couldn't care less. All they are concerned about is the money being shoveled out the door by central banks.

And I call that the grand disconnect between the real economy and investors' view of the world.

Shilling thinks the world economy isn't really doing that well... and that you can't get sustainable prosperity and sustainably higher stock prices by printing money. He thinks the Grand Disconnect has to end badly...

I think sooner or later it will be eliminated by some big shock... I think it could [be this year] but forecasting big shocks like this is obviously difficult. It's in the cards, it's just a question of when it will happen.

So where should you invest while governments are printing money today? Shilling's answer will surprise you. He doesn't like stocks or real estate at all. And he's "agnostic" on gold.

So where is he recommending you put your money? Cash.

There still is some inflation in the economies of the world – but not much. So cash is not eroding due to inflation the way it was way back in the 1970s... cash is not a bad place to be.

Astoundingly, Shilling is not giving up on his 30-year-old big idea either. He's buying Treasurys, even though they only yield 3%. Why? He explains it:

I've never, never, never bought Treasury bonds for yield. I couldn't care less what the yield is, as long as the [yields] are going down. In other words, I want the [price] appreciation... If they go down further, we will go from 3 percent to two percent... On a zero coupon bond, it'll be a total return of about 25 percent.

Because of Shilling, I have never bet against Treasury bonds in my near-two decades in the markets. It's been the right thing to do, every time.

And I think Shilling is right about the Grand Disconnect.

His idea is not far from my Bernanke Asset Bubble idea. As regular readers know, Federal Reserve Chairman Ben Bernanke's zero-percent interest rate policy and enormous money printing has fueled a "bubble" that has propelled asset prices higher.

I agree on the Grand Disconnect – in the sense that you can't create prosperity out of printing money... and that the piper has to be paid someday.

But we disagree on the date that bad things start...

Shilling thinks the Grand Disconnect will cause stock prices to crash in 2013. I think we have a couple more years left.

Good investing,

Steve

P.S. You can find the full Gary Shilling interview with Canada's Globe and Mail here.

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