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Economist who called last bubble says we're already in recession

MarketWatch logo MarketWatch 6/25/2019 Barbara Kollmeyer

Stock markets are looking like hard work for the day ahead, thanks largely to escalating tensions between the U.S. and Iran.

Investors, who are awaiting this week’s G-20 get together between President Donald Trump and China’s leader, are now juggling a tense war of words between Tehran and D.C. Just words, we hope.

We could use a bit of good news right about now. Enter our call of the day, from economist Gary Shilling, known for predicting bubbles like the housing debacle of 2008. Shilling talks about another worry for investors -- a big bad recession -- in an interview with digital financial media group Real Vision.

“I think we’re probably already in a recession, but I think [it will] probably be a run-of-the-mill affair, which means real GDP would decline 1.5% to 2%, not to 3.5% to 4%, you had in the very serious [past] recessions,” said the president of money manager A. Gary Shilling & Co. He also lays claim to having forecast a global inventory glut that led to the 1973 to 1975 U.S. downturn.

Shilling says some of the biggest potential drivers for an economic pullback — heavy corporate borrowing, a strong dollar that’s pinching emerging markets, and trade wars — are fairly small potatoes versus the problems of the past.

Shilling says stocks probably wouldn’t fall under that GDP scenario. If they did, he predicted a fall akin to the average drop during the last three recessions — 22% from the peak. That scenario, he said would roughly take the S&P a couple hundred points below the Christmas Eve low of 2,416.62.

He also predicts the 10-year Treasury yield will drop to 1%, if that type of recession is borne out along with lower inflation. The yield on the 30-year T-bond would drop to 2%. “Actually, if that happens on a 30-year coupon bond, you make about 20% on your money,” he said.

Shilling is referring to 30-year zero coupon Treasurys. Investors can buy these type of bonds at a discount, but redeem them at face value in the future, allowing for a profit. They work well in low-interest rate environments, but are less good in rising ones. Hence the risk. Read that whole interview here.

Related video: Strategist says there could be a 'mild US recession' in 2020 (provided by CNBC)

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