So as a result, Gary Shilling is long the deflation trade: "long treasuries, short stocks, short commodities, and long the dollar." In 2010 and 2011, Gary Shilling correctly predicted that the 30-year Treasury bond yield would retrace back to 3% and 2.5% (hit a low of 2.69% back in October 2011, still sees 2.5%), but his call on the S&P 500 hasn't panned out yet. He was calling for the S&P to make a new low (600) in 2009 and early 2010, but was ultimately beat by the reflation trade when the Fed backstopped the banks and markets, which artificially boosted the economy and EPS after the mass layoffs. So this time around, if there's a new recession in 2012 like Shilling says, the Fed could try to backstop asset markets with a QE3 program. But, can the Fed step in front of a recession and backstop the S&P 500, economy, and earnings? That would be interesting to see. Now there's chatter that QE3 could come in the form of sterilized asset purchases: "There is nothing "novel" about the Fed's "sterilized" purchases" (Sober Look), "Goldman on sterilised QE" (FT Alphaville).
Below is the 6 year weekly S&P 500 ($SPX) chart with technical indicators from stockcharts.com. I probably should have gone back to 2003 instead of just 2006, but check out the trends of the PPO (Percentage Price Oscillator), Money Flow Index, Relative Strength Index, and Williams %R ("reflects the level of the close relative to the highest high for the look-back period"- stockcharts.com).
Columns written by Gary Shilling on Bloomberg.com recently:
Will U.S. Avoid Recession in 2012? (Part 1) 4/9/2012
Will U.S. Avoid a Recession in 2012? (Part 2)
Will U.S. Avoid a Recession in 2012? (Part 3)
Will U.S. Avoid a Recession in 2012? (Part 4): Shilling