Guru watch

“A recession will start later this year,” argues writer and economist Gary Shilling in an article on Bloomberg. Shilling – who has long held the view that the world is in the grip of structural (long-term) deflation – believes that the current turmoil in US stock and bond markets is a warning sign that the economy is running into trouble, partly driven by the “dramatic shift” in the Federal Reserve’s approach to monetary policy in reaction to rising inflation.

So what does that mean for investors? The first point, writes Shilling, is to be “long the US dollar against other major currencies”. Not only do higher interest rates tend to make a currency more attractive to investors, but the US dollar is seen as a safe haven when other assets fall. By contrast, “sterling, the euro and the Japanese yen have been especially weak and will probably continue to be so”.

Despite the recent drop in bond prices, Shilling reckons investors should look at US Treasuries. Yields on US government debt have risen this year, but already this “may have fully discounted the Fed’s credit-tightening campaign.” Also, once the economy slows, the Fed will “reverse gears and ease credit... Treasury bonds will rally at that point”.

Shares, on the other hand, “are a long way from the bottom if the recession and bear market unfold as I predict”, he says. Shares in growth companies and housebuilders look particularly vulnerable, and even consumer staples stocks – those that sell necessities – struggle during recessions. Cash might be a better bet – it will still lose value after accounting for inflation “but it will provide much better returns than plunging stocks”.