Gary Shilling

Gary Shilling, the self styled independent economist and financial analyst, has reinforced his prediction that the US economy will fall into a new recession in 2013. He predicts that the downturn in the economy will be good for bonds, but very bad for stocks.

There are a few things about Gary Shilling that one should be familiar with before taking his advice. First of all, he’s been predicting a large fall in equity pricessince at least last April. Back then, in an interview with Bloomberg TV, Shilling foresaw a 2012 drop of 43% in the S&P 500 (S&P Indices:.INX). Since April the index is up about 5%.

This doesn’t mean that he’s necessarily wrong, but it certainly means that his timing was off by quite a bit. If you keep predicting recession, you will be right once every three to five years. You can always claim that your timing is off. Just ask Kyle Bass.

The about page on Shilling’s web site mentions predictions he has made in the last fifty years that have panned out. The highlights includes the correct prediction of a recession in 1969, 1973, 1979 and 1991. His other predictions includes the lowering of Fed rates in 2003, and the pressures that led to the recession in the 1970s.

To reiterate, if you constantly predict recession you will be correct quite often. Weathermen, however, would not get paid for predicting rain every day and lauding their achievements when they are right. This is not, of course, the fault of Gary shilling, it is a characteristic of forecasting in general.

Shilling has been advocating bonds, particular Treasury Bills as an investment since at least the early 1980s. He hasn’t been wrong about them. Treasury bills have been consistent, they simply have not been the best place to put money in order to see it grow. If they were, we would barely have an equity market, and complex financial instruments would never need a reason to exist.

Nevertheless, Shilling is continuing to predict a recession in early 2013. If it does come about, he’s predicting a fall in the equity market, and a rise in stocks. Shilling thinks that a recession in 2013 will cause a crash in equity prices as corporate earnings get squeezed. This leaves Treasury Bills, and their sell off value, as the best investment to make right now.

If a recession does arrive in 2013, Shilling may well be right about what to invest in. Treasury bills were becoming more popular toward the end of 2012, as investors worried about the fiscal cliff negotiations. In a tough equity market more investors are likely to get into bonds for safety. Higher demand means higher prices.

Treasury yields are, however, tiny compared to the possible yields from equity investment. This means that a 2013 investment in bonds results in a huge loss if a recession does not arrive. Investors trying to maximize their return will not yet be running heel for leather toward T-bills.

There is a recession in Europe, and Japan is not the most stable place in the world right now. The US may well enter recession next year, just don’t take Shilling’s word for it.