Prominent Deflationist Schilling Sees Deflation, A China Hard Landing And 800 On The S&P

Tyler Durden's picture

When one compiles the annals of the great deflationists of the early 21st century, they will be hard pressed to decide who is deserving of the title most ferocious deflationist in a runoff between David Rosenberg and Gary Schilling. And while David did not have much notable to say today, despite his daily release of interesting and insightful commentary from his perch atop Gluskin Sheff, Gary Schilling took advantage of the media vacuum to appear on Bloomberg TV and preach, what else, deflation. Among the topics touched upon were the #1 issue du jour - the Chinese hard landing, presented earlier here, and the resulting collapse in copper, on bond market volatility, on investing and speculation, and lastly on the S&P, which just like Rosenberg, he see as deserving of a 10x multiple applied to a soon to be revised S&P 500 EPS of 80 (do the math). All in all sensible stuff except for one thing: his statement "Inflating away is an excess supply world is almost impossible, even for the Fed" leaves a little to be desired. While he may be spot on, it does not mean the Fed will not try. And try it will: we expect rumblings for full blown LSAP to commence in a few days, and QE4 in which the Fed will pull a BOJ and buy ETFs, REITs (in addition to MBS and Agency bonds) early in 2012, after which it will be time to quietly depart from these continental US, or else load up on lead, spam and precious metals.


Schilling on how much further the 30-year Treasury bond yield could fall:
"I think [the 3-year Treasury bond yield] might go back to 2.5%. That's where it was at the end of 2008 in the aftermath of the Lehman Brothers meltdown. That's my target for now. I think we are looking at deflation. As I said back then, I think that will be the media chatter by the end of the year. Plus, the weakening economy here and abroad. The long bond, the 30-year Treasury, is the ultimate safe haven in the world."
On why Schilling sees deflation on the horizon:
"In my new book, I identify seven different types of deflation. Now five of those are already in place -- we're having financial asset deflation, tangible asset deflation, commodities are coming down, wages are coming down. The one that hasn't kicked in yet is goods and services deflation. The point is that the whole world is really marking down assets. It's marking down the whole spectrum. I don't think goods and services are going to hold up in terms of inflation. I think that will move to deflation fairly soon."
On whether the Fed will decide to try to accelerate inflation:
"In effect, [the Fed] tried to do that with QE2. Because you remember at the time they were worried about deflation… That was one of the objectives. Of course, they spurred commodities, they spurred stocks and they got a temporary offset. But I think the forces of deleveraging in the world are greater than the Fed can handle. We're marking things down to equilibrium. Look at government sovereign debts around the world. They're much greater than taxpayers can handle. You either have to mark them down or get somebody else to handle them, like the Germans, or try to inflate them away. Inflating away is an excess supply world is almost impossible, even for the Fed."
On volatility in the bond market:
"In the portfolios I manage, we've maintained our 30-year bond positions. We haven't really changed them. We've changed them a little bit over time. When they got to 2.5% at the end of 2008, I said, we've gotten every pullback….It is awfully tricky to do this on a daily basis. At this point, I don't see anything that has fundamentally changed either in stocks or bonds. You have this volatility, this event-driven market. It's great for the latest news. Is Greece like to pass a law to tax itself or not? Markets jump up and down 100 points on the Dow. That is ridiculous. That is whipsaw. It shows a lot of day trading. It shows a lot of program trading. It doesn't show a lot of investing."
On other places to see a safe haven outside the Treasury market:
"There are some [safe havens] in the real estate area. We like medical office buildings. That's because of aging populations, the new medical health care bill, and improving technology. Also, 55% of physicians work for hospitals. Private practices with a storefront are disappearing. They're moving into campuses… Another one is rental apartments. People are deciding a house is no longer a sure shot investment. Prices can and do fall. They have, for the first time since the 30's…Rental apartments will continue to be very attractive."
On metals like gold, silver and copper:
"I'm agnostic on the precious metals. We have in our portfolios been short copper. Copper peaked out in February and it's down about 25% from its peak. I think it will go a lot lower. As you pointed out, copper goes into almost anything manufactured. It's a great indicator of global industrial production. What I think will really knock the pinnings out from under all commodities is a hard landing in China, which is what we're forecasting."
"[The Chinese] are trying to cool off a red-hot economy. They're worried about the property bubble and the high inflation rate. They are affecting a soft landing and with their crude economic tools it's tough. Bear in mind, the Fed, with more sophisticated tools, tried, by my reckoning, 12 times in the post World War II era to cool off the economy without precipitating a recession. They only succeeded once. What are the chances for China?"

On whether the stock market will go down: 
"I think it probably is [headed back down] because the economy here is slowing, and it's global and of course a lot of the S&P 500 companies have their earnings predominantly overseas. In that kind of environment, we're going to see disappointing earnings. The Wall Street analysts always optimistic, of course, crank down their numbers….If you put a ten multiple on it, we'd be at S&P 800."
"We had a big sell-off but I really suspect that this is a pause before things drop further."

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GeneMarchbanks's picture


If I had a shilling for every time Gary called deflation!

Herd Redirection Committee's picture

"A world of excess supply"  EXCESS SUPPLY of what?  Fiat currency?  Debt slavery?  Yes, if there were bankruptcies there would be deflation.  But when the bankruptcy is the nation that has the world reserve currency, what then?  

Are all the (supposedly) sovereign nations going to declare bankruptcy, or monetize their debts.  The third option of balancing the books is politically off limits.  Cuts to the Pentagon/DoD/Defense budget are apparently out of the question, even when EVERYTHING else is on the table. No one knows for sure, other wise you could make a large amount of money from that knowledge, then again, there would be no other side of the trade, as either Treasuries would immediately plummet (if bankruptcy was imminent) or Gold would soar (if monetization on a large scale was/is imminent).

Check out the latest from the Capital Research Institute: "Consequences of a Trillion Broken Promises"

"Who doesn’t want to see America re-industrialized, and the Greece dilemma settled in a just and fair manner?   The people who have the most to lose, obviously.  The same people who made money outsourcing the Middle Class, the people who are making money as we speak from sweatshop labor in Vietnam.  People who lent the Greek government billions, and now want everyone, any one, to take their bad debts from them.  A 100 cents on the dollar, of course.

Which is ridiculous, the antithesis to what our society claims to espouse, evolution and capitalism.  Survival of the fittest.  Keeping your winnings all to yourself also means accepting  personal responsibility for your losses.  When a society allows losses to be socialized and gains privatized it is firmly in the hands of an Oligarchy.   So who lent all this money to the Greek government any way?  Well, turns out it was the financial institutions and governments of Europe!  French banks just could not keep their snouts out of the trough.  But who are the major investors in French banks?  The financial institutions of Great Britain, United States of America, and Germany!  Well doesn’t that just spell it out for you, why ‘contagion’ will not be allowed to spread?  Why losses on Greek debt must be ‘contained’ and prevented from ‘cascading’?"

Duffminster's picture

They will try to contain them but there are still some nations where Democracy is not fully corrupted, starting with Germany.  In Germany it seems evident (and according to their Supreme Court) that anything resembling Euro Bonds including the mirrage of the SIVs and the EFSF and their new convuluted Eurobond proxy will not fly with the people of Germany. 

Will the Fed return to QE 3, 4, 5, ... N.  Yes, but only after there member banks are even further on the ropes and there is no political will for TARP 2 in Washington with the influence of the Tea Party being so strong.  Long term, one would hope that the ruling banking (financial amalgamations) Oligarchy are not able to further pull the wool over the eyes of the people.  

Either way, in the end, even monetization will not succeed and as Fischer of the Fed has been discussing, the efficacy of monetizaton seems to become proportionally less effective as the monetization becomes a greater and greater percentage of all debt purchases and for that matter of any other asset class purchases. 

Long term, gold and silver become the global reserve currency.  Short term, everything gets sold, even gold and silver.  I'm not selling my physical precious metals but I did sell my ETFs and for the short term, my miners because China is looking really weak and especially its banks and the political grid lock in DC makes immediate bailouts look much less likely.

Comay Mierda's picture

CPI is running hot at 11.4% right now using 1980 methodology before the BLS suggested we can all eat dog food instead of real food and changed the methodology.  and this asshat is saying there's deflation.  How much does he get paid?  fuck him

flacon's picture

TRUTH is the enemy of the STATE! If the TRUTH were told there would be a revolution by tomorrow morning. The last duty of a Central Planner is to tell the TRUTH!


I have absolutely no doubt that the government will place in front of every American a beautiful steak dinner every day. Here's how:


1. Government visits this link:

2. Hit CONTROL-P (x300,000,000)

3. Fold paper and insert in envelope

4. Go to FedEx and mail the letters to all citizens




....OH, you wanted a REAL steak? That was NOT in the contract. It said "Steak Dinner" - here is your steak dinner. Now eat that paper and rejoice, fucker!

Ahmeexnal's picture


A recently published book, by one of the most influential German newspaper publishers, is pleading for a transition toward "less democracy." The "voice of the people" and the "emancipatory Zeitgeist, putting everything into question," has too much of a "paralyzing influence" on current governance, writes the publishing house in its blurb for the book. The author therefore demands to "correct the system" for "more efficient policy making." These "corrections" must include the dismantlement of democratic participation.

The book, recently published under the title "Dare Less Democracy" is being heavily promoted by public broadcasting stations, for example the Westdeutsche Rundfunk (WDR), with close affiliation to the Social Democrats. For some time, influential circles of the German elite have been demanding dismantlement of democracy in Germany. The recently published book will bring this debate into a broader public.



Pinto Currency's picture


Gary Schil forgot to mention that when he is talking of deflation, it is of the price of goods measured in silver and gold.  From that perspective I totally agree.

He just had a seniors moment.

If you look at the 15 year chart here and can't see deflation, Gary has some special deflation glasses to sell to you:





Hugh G Rection's picture

CPI 11.4%, how dare you! Real inflation is measured by the dildo/Ipad index, as long as people can still afford to fuck themselves there is no inflation.


Stagflation bitchez!

DonutBoy's picture

You're right about CPI, but there is deflation in some assets, like housing.  Things purchased with debt are deflating, necessities purchased with cash are inflating.  It's not a straightforward picture with a single metric. 

When Greek bonds are officially defaulted, and the bank balance sheets crater - money in the fractional reserve dissappears - it's gone.  Is it possible that waves of defaults extinguish money faster than the Fed and ECB create it?  Yes - that's possible.

narnia's picture

who is anybody kidding here?

the debt of soverign nations (direct or indirect through contingent obligations on deposit insurance on fractional reserve funded assets of the banking sector) cannot be written down to their FMVs.  this debt can only be extinguished by printed cash from central banks.

this is true whether the governments of the world don't spend another dime tomorrow, whether all the budgets are balanced, or whether they continue to deficit spend and print.

Pladizow's picture

What happens in a deflationary environment where the sheep lose faith in fiat?

Hugh G Rection's picture


Good answer from the fractal smurf vagina.

bid the soldiers shoot's picture

They sing Bach:

Sheep may safely graze
where a good shepherd watches.
Where rulers govern well
we may feel peace and rest
and what makes countries happy

Schafe können sicher weiden,
Wo ein guter Hirte wacht.
Wo Regenten wohl regieren,
Kann man Ruh und Friede spüren
Und was Länder glücklich macht.

tlil5774's picture

Eeerrrrrr, what about if you added to your long bond holdings every time Gary called deflation......?

covert's picture

deflation is a theroy that never materializes


mynhair's picture

He can see with those eyes?

Cheesy Bastard's picture

He can't see very far.  He can see step one (deflation), but misses the next step altogether.

WonderDawg's picture

Missed the next step or just didn't project that far? Hard to say what's going to happen after a deflationary collapse.

Cheesy Bastard's picture

Then the Fed will print us right into a currency crisis.  First dollar strength on euro weakness, with more downside in equities and commodities.  Then hyperinflation. 

scatterbrains's picture

yea but how tricky will it be knowing when to flip from short to long though ?

Cheesy Bastard's picture

Around the time we retest the 666 lows of March 2009.  Silver at $18 or so should be around bottom.  Remember they will be talking about $4 silver at that time..

akak's picture

No, silver will never drop below $5 an ounce --- because, you know, that is the cost to dig it from the ground.

(At least a former wannabe sportscar owner used to tell us that here all the time.)

poor fella's picture

I'm thinking $12 is when ALL the weak hands really lose their grip. But I have no problems buying on the way down to those levels or at higher levels (just on a smaller basis). It really is a win-win for the patient investor (which most of us probably are since we use OUR OWN MONEY!!!)

tlil5774's picture

That's simply disrespectful in the extreme - he's on record for having been long the 30 for years and short copper in 2011, so wouldn't it make sense to let him cash in on those bets before he tells you what "the next step" is? Or for a different take, it might be better for you to ignore my take on this and just remember the quote from Paul Tudor Jones in his Market Wizards interview (p. 131); "Judge not, least you be judged".

Cheesy Bastard's picture

If I disagree that the fed cannot inflate, that is not disrespectful.  I am tempted to tell you what I really think of you, that would be disrespectful.  Judge till your little heart's content, now.

mynhair's picture

30-yr fall back?  Didn't today.  Was slapped like a red-headed step-child.

Been there, done that, barely escaped.  (TMV)

(Yes, I sold too soon, damit!)

pslater's picture

"(Yes, I sold too soon, damit!)"  Me too.  No one ever went broke taking profits....

spartan117's picture

Agnostic on gold and silver?  Maybe he doesn't want to rock the boat because he still has friends in the paper industry.

Bicycle Repairman's picture

His whole presentation is a bunch of weasel words.  Agnostic on gold and silver?  Give me a break.  We're talking about the whole game here and he has no opinion or discussion?.  And he sees deflation ..... for the next six months.  Thanks for the trading advice Gary.

See you in 2012.

akak's picture

When it comes to these deflationists, I see ...... dead people.

bid the soldiers shoot's picture

"We're talking about the whole game here."

Spot on, Bike Guy

Tsar Pointless's picture

Nobody can do the Shilling like he do!

The S&P @ 800 is still overvalued by roughly 800-ish points.

kato's picture

"They" did not call it 'Inflation' on the way up - housing prices are not part of inflation stats -, so now that housing prices are going down, it is not 'Deflation'. Food prices are up. The Cabal is wedded to housing prices NOT going down, so "They" call it 'Deflation'.

Pladizow's picture

I think housing accounts for 42% of the CPI - but I could easily be wrong?????

kato's picture

So too could I be wrong. I am quite sure that housing prices are not factored in, while rent prices are.

Rainman's picture

Correct....equivalent rents. Dropping also, but a trailing indicator for housing prices in the sand states.

Bicycle Repairman's picture

A trailing indicator?  Yeah, I think so. 

And put me down for some rental housing when rents are going to be falling for a decade.

UP Forester's picture

Uncle Sugar has tent you can rent.  Only cost you 11 hours a day cutting timber, planting pine trees, and maybe building a dam or two.  Free meals of potatoes and whatever gets scraped off the road that day.

They don't know whether to call their rentals "Worker Protection Associations" or "Consumer Consolidation Camps."

Either way, renters will be protected from wild animals, Al Qaida and roving deflation by barbed wire and guard towers.


Come on, do it for the children....

Deadpool's picture

"quietly depart from these continental US, or else load up on lead, spam and precious metals." hey! has Tyler been reading our posts on Simon le Black?

Robot Traders Mom's picture

@deadpool-your posts have no point except to spread bullshit lies that the US is the greatest country in the world and nowhere else is safe. Or the last one, where you called the supposed 'terrorist' in DC a dumbass, as if you give credence to the false flag garbage spread by the gov't.


Play this one off, because you are a fucking gov't troll.


Like I said earlier, go fuck yourself.

schadenfreude's picture

Too many distraction from too many strange people.....has this site been hijacked by clowns and trolls?

New_Meat's picture

In general, t'were always more or less a free for all.  But, well, Mom needs a new razor and is kinda' bitchy these days.

- Ned

Robot Traders Mom's picture

@newmeat-yes, you are correct that it has been kind of a free for all. My problem is that the trolls before, like Robot, just lacked social attention and try to get it on a financial blog. The new trolls are sneaky, knowing not to stir the pot, but to say something believable by people learning about the mess we are in and people who don't think.

Knowledge is power and he clearly has an agenda and is one of the 'others.' He usually tries to laugh it off, but he is spreading pure bullshit.

I did have a razor but my dumbass kid took it.

Trimmed Hedge's picture

EPS for gold & silver = 0

mynhair's picture

So buy NFLX, and STFU!

Dam non-traders never look at the AGQ and ZSL range per day.  Sick of these klowns.

Dumbass Denninger wannabes.

Sequitur's picture

Yep. My bets are on food, utilities, medicine -- the shit the world needs and will pay for, even in a deflationary environment. This post is spot on, this is the future. Deflation.

oddjob's picture

Deflation in an enviorment of fleeting USD hegemony is truly wishful thinking. You'll get your S&P 800, just dont count on shit you need being any cheaper.