On Treasuries and deflation:
"Well, the 10-year may go to 1%. And the 30-year, you know my target was 2.5%, we're there now. It could go to 2%. This is a matter of a safe haven. It's also a developing global recession, and I think we're probably in a U.S. recession right now. Certainly in Europe, and China's in for a hard landing. And the third thing is deflation. Deflation is really starting to pop out all over. We're seeing a decline in oil prices, commodity prices in general. And those three factors could drive the long bond, the 30-year Treasury, even further to 2%."
Short term risks to his outlook:
"Well, if there were a resolution to the European crisis; if U.S. consumers went on a wild spending spree so we didn't have a recession; if China somehow got itself straightened out and didn't have a hard landing. And finally, probably the greatest risk is that the Fed comes in with a QE3 or something like that that gives a temporary bump to stocks. I mean that's the idea of putting more money in the economy. And you could get a comparable sell off in Treasuries."
On home prices falling by another 20%:
"If you have what we what we think are 2 million inventories over and above normal working levels, that's the kind of thing that depresses prices. Excess inventories are the mortal enemy of prices" (*and the $25 billion foreclosure fraud settlement by the big banks will increase inventories and markdowns of foreclosed homes).
Ever since the market crashed and bottomed in 2009, Shilling's ultimate view has been that the U.S. economy is in a long-term deleveraging cycle that will last a decade. And he's been right that home prices would keep falling and the 30-year Treasury yield would hit 2.5%, but his view that the the S&P would re-test or break through the 2009 bear market low didn't pan out (1, 2), courtesy of the government and Fed's reflationary policies. His views are somewhat similar to Elliott Wave International's Robert Prechter, who believes that the Fed can't beat natural forces in the end. But, is it possible for the S&P's price/earnings ratio to rise as EPS falls (either stocks trade sideways or move higher) in a recession and deflationary environment as a result of monetary inflation (printing money, QE injections)?
Gary Shilling still bearish on June 5, 2012 (also available on Bloomberg.com).
Gary Shilling being right on the economy, housing, stocks and Treasury bonds back on November 27, 2006 (embedded at the correct time).