Suddenly, Gary Shilling's Bearishness Doesn't Seem So Nutty

The best bet for most investors right now is probably a highly diversified portfolio with uncorrelated assets that can profit (or at least preserve capital) as the market seesaws back and forth between the "risk-on" reflation trade and the "risk-off" deflation trade.

But Shilling, president of A. Gary Shilling & Co., is a charter member of the risk-off deflation camp and is positioned accordingly:

• Short Stocks: Never a believer in the recovery, Shilling says stocks "have gotten way ahead of themselves" and says there's a 30% chance the devilish lows of March 2009 (S&P 666) will be retested before this secular bear market ends.
• Long Treasuries: Treasuries are "THE safe haven," Shilling says, predicting the yield on the 30-year bond will go to 3%; that would be an over 30% appreciation from current levels and about 55% for his old favorite, zero coupon bonds. "That not a bad return when you look at the alternatives," he says. "I don't think we'll get anything close to that from stocks."
• Long the Dollar, Short Commodities: Shilling is long the dollar vs. the euro, British sterling and Aussie dollar, the latter of which is a bet on a slowdown in China. Australia "has become a Chinese colony," Shilling quips. But it's no joke that a China slowdown will, by definition, hurt demand for commodities, most notably copper.

Broken Clock or Crazy Like a Fox?

Anyone familiar with his work and writings knows these are time-tested themes for Shilling. In December 2008, he put a 2009 target of 600 on the S&P 500, which nearly came true. But instead of declaring victory, Shilling reiterated that forecast here in March 2009, and stuck by the bearish guns in May 2009 and again in February 2010.

Back in February, Shilling was starting to look stubborn at best, and out of touch at worst. Now, however, his bearishness doesn't seem so crazy, what with:

• The U.S. housing market downshifting, unemployment still high and consumers cutting back again.
• The euro zone teetering on collapse about about to trigger another global financial crisis or "just" heading for a steep drop in growth amid all the austerity measures. (For more on why Europe matters, see: No Escape from Europe's Rubble)
• China trying to tamp-down inflation.
• Japan still a basketcase.
• Sovereign debt looking like the new subprime.
• The dollar benefiting from its "best house in a bad neighborhood" status, which is lulling policymakers into a false sense of security about America's ability to continue its profilgate spending.
• U.S. stocks expensive on a long-term cyclically adjusted P/E basis. 

"Trying to time this is tough -- it always is," Shilling tells Henry in the accompanying clip. "Deleveraging is difficult to predict [and] it's happening in discreet pieces. That affects investor sentiment and market behavior. "

Check the accompanying for more on why Shiling isn't worried about inflation (hyper or otherwise) and doesn't think you should be either.