Economis Gary Shilling,whose bond recommendations provided stellar returns in 2011, updates his outlook for bondholders and discusses two new investment favorites for 2012.
Last year was a rough year for investors. You’ve been a super bull on the bond market for 15 or 20 years, and last year had to be one of your best—up over 33%, and I guess over 50% on the corporate side.
So, obviously everyone wants to know, do you still like them, and what else do you see for2012?
Well actually, last year was a very good year for us. We had 19 investment themes, and 15 of the 19 worked.
One of them was 30-year Treasuries, which did gain 33% on a coupon bond, and on a zero-coupon it was 52%. We still like those. The yield now is 3%.
I mean, I’ve liked them since they were 15.25% in 1981. I said then we’re entering the bond rally of a lifetime. Since then, long-term Treasuries and zero-coupon have outperformed the S&P 500 on a total-return basis by 9.3 times—9.3 times.
I assure you they’re only suitable for little old ladies and orphans, but I still like 30-year Treasuries, because I think we’re going from 3% to 2.5%. That’s a low yield that we got to after the Lehman disaster in 2008. I think it’s a reasonable target because we’re in a world where Treasuries are the safe haven. I think we’re going to be in a global recession this year, and deflation is looming.
If we go from 3% to2.5%, it doesn’t sound like much, but that will make it 10% on a coupon bond and 12% on a zero-coupon 30-year Treasury. So I still like that.
Yeah, I know.You were smart enough…I think you covered some when they got to 2.5%, and then you bought some more when they got to 4.5%.
That’s right. We did. At the end of 2008…every year in January in our newsletter, we list our themes, and in January of 2009, we delisted that one. But then the yield jumped up to 4.5%, and we got back on board and said that we think that this bond rally of a lifetime has had rejuvenation and is back in place.
So if they get down again to 2.5%, you’ll probably be lightening up again?
Well, yeah. Right then, what would be important then is what’s happened to inflation/deflation. I mean, if you have any degree of inflation, 2.5% is not attractive, but if you have 2% or 3% deflation, then 2.5% would be 4.5% to 5.5% real return, and that’s very good.
Heretofore, over this 30 years, I’ve never, never, never, never, bought Treasuries for yield. I couldn’t care less what the yield is as long as it’s going down. I buy them for the same reasons most people buy stocks—appreciation.
Right. What else do you think will appreciate in 2012?
One other area that I like is North American energy. I think as a country, we’ve decided that we want independence, or at least less dependence on unreliable energy from Venezuela, the Middle East, and so on.
So it’s a whole range of conventional energy. It could be the tar sands and oil sands in Alberta. It can be offshore drilling. I think nuclear is coming back.
With natural gas, of course, prices are collapsing because of fracking and horizontal drilling. But pipelines, I think, are attractive because they’re going to produce a gas—if they don’t, they lose their leases—and they want the natural gas liquids out of that, propane and butane. So, pipelines, I think, are attractive in that area.
I’m not in favor of the renewable energy, whether it’s solar or wind, or whatever, because it takes so much government subsidy, and the government giveth and the government can taketh away. The government is under fire, obviously, to cut budget deficits right now. So, I don’t think renewables are attractive.
Exactly. Yeah. I was interested to note on the list, I know they’ll have to come to be a subscriber to get maybe the full list, but you also liked medical office buildings.
Yeah, I like medical office buildings, because, of course, the whole medical-care area continues to expand.
Postwar babies are moving on in years. They need more medical services. The medical bill of 2010 added 32 million people to the insured rolls. And, of course, medical technology is coming along.
Another interesting thing—all these things are going to expand the medical services, but another interesting thing is that now 55% of physicians are employed by hospitals. So,you’re having a shift out of kind of a storefront office into a hospital campus or maybe a satellite, and that’s adding a great deal of demand.
This is a lot morestable than many other forms of commercial real estate. I think it will remain attractive.
So, a REIT that maybe would handle it?
Right, that would handle those kinds of investments.
Do you have more you want to share briefly?
Well, on the long side, I like income-producing securities after they collapsed in stocks and almost everything else except Treasuries, gold, and the dollar in 2008.
I think a lot of institutions and individual investors said, “Show me the money now.” I’m not going to wait for pie-in-the-sky capital gains, and of course, the S&Plast year went nowhere. It has been absolutely flat since 1998, and so people are saying, "I want money here and now.”
That means income-producing securities, investment-grade corporate bonds, municipals, master limited partnerships. And of course, in a stock arena, utilities, some of the consumer staples, the pharmaceuticals—things that pay high, sustainable, and increasing dividends.
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