Advertisement
U.S. markets open in 2 hours 27 minutes
  • S&P Futures

    5,306.75
    -1.50 (-0.03%)
     
  • Dow Futures

    40,146.00
    +2.00 (+0.00%)
     
  • Nasdaq Futures

    18,497.00
    -6.75 (-0.04%)
     
  • Russell 2000 Futures

    2,137.90
    -0.50 (-0.02%)
     
  • Crude Oil

    82.19
    +0.84 (+1.03%)
     
  • Gold

    2,233.40
    +20.70 (+0.94%)
     
  • Silver

    24.82
    +0.07 (+0.27%)
     
  • EUR/USD

    1.0792
    -0.0037 (-0.35%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    13.00
    +0.22 (+1.72%)
     
  • GBP/USD

    1.2617
    -0.0021 (-0.17%)
     
  • USD/JPY

    151.3880
    +0.1420 (+0.09%)
     
  • Bitcoin USD

    70,809.66
    +696.48 (+0.99%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,956.70
    +24.72 (+0.31%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Investors too dependent on the Fed: Gary Shilling

The U.S. economy is showing signs of improvement: unemployment is at 6.1%, the lowest rate since September 2008, and Q2 GDP grew at a 4.6% annual rate. But Gary Shilling, president of A. Gary Shilling & Co., doesn’t think that's enough.

“There’s a huge difference between the economies of the world, which are growing on a subpar basis and all of this investor concentration on what the central banks are doing,” he says. Despite accelerating growth in the second quarter, real U.S. GDP grew by only 2.5% in 2013, below estimates.

It’s not only the U.S. that's been experiencing relatively slow growth. Japan actually saw Q2 GDP contract at an annualized 7.1% rate and Eurozone GDP grew only 0.7% in the 12 months through July. Meanwhile, central banks in Asia, the U.S. and Europe are buying bonds to boost markets. Shilling calls it the “grand disconnect.”

“If the economy isn’t growing,” says Shilling, “you’ve got to think about something and it’s about all the largess the central banks have been providing—all this money they’ve been pumping out.”

Of course market bulls would argue that a strong market indicates the economy will still pick up. “That’s what the bulls have been saying for the last four years,” quips Shilling. “But if you look at the Fed, along with the consensus, every year they start out with a forecast of about 4% real GDP and they end up with the reality of about 2%.” In every year since 2008 Fed officials have reduced initial expectations for GDP, and in every year except 2012 they have still overestimated the strength of the economy.

Shilling believes this is because we’re in the age of deleveraging—meaning that we’re working down the excess debt built over the past 20 years or so. “We’re six years into it so if history is any guide, we have four more years to go,” he says.

It’s a tough situation for the Fed to be in, according to Shilling. “If they raise interest rates they worry about the economy faltering,” but there are also “collateral damages, if you will, with all of this zeal for yield with low interest rates and people moving out on the risk curve into junk bonds and deleveraged loans.”

With regards to the Fed, Shilling doesn’t see anything changing soon. “The Fed is really locked into these [low] interest rates despite the distortions it has caused and I think that’s what you should expect from here on out,” he says.

Advertisement