A. Gary Shilling - Six Realities In An Age Of Deleveraging

by Lance Roberts of Street Talk Live blog

In Part III of Lance's series of reports from the 10th annual Strategic Investment Conference, presented Altegris Investments and John Mauldin, the question of how to invest during a deleveraging cycle is addressed by A. Gary Shilling, Ph.D.  Dr. Shilling is the President of A. Gary Shilling & Co., an investment manager, Forbes and Bloomberg columnist and author - Mr. Shilling's list of credentials is long and impressive.  His most recent book "The Age Of Deleveraging: Investment Strategies In A Slow Growth Economy" is a must read.  Here are his views on what to watch out for and how to invest in our current economic cycle.

Six Fundamental Realities

• Private Sector Deleveraging And Government Policy Responses
• Rising Protectionism
• Grand Disconnect Between Markets And Economy
• Zeal For Yield
• End Of Export Driven Economies
• Equities Are Vulnerable

Private Sector Deleveraging And Government Policy Responses

Household deleveraging is far from over. There is most likely at least 5 more years to go. However, it could be longer given the magnitude of the debt bubble. The offset of the household deleveraging has been the leveraging up of the Federal government.

The flip side of household leverage is the personal saving rates. The decline in the savings rate from the 1980’s to 2000 was a major boost to economic growth. That has now changed as savings rate are now slowly increasing and acting as a drag on growth.

However, American’s are not saving voluntarily. American’s have been trained to spend as long as credit is readily available. However, credit is no longer available. Furthermore, there is an implicit mistrust of stocks which is a huge change from the 90’s when stocks were believed to be a source of wealth creation limiting the need to save.    

German Commerzbank Suggests Wealth Tax In Italy Next

by Tyler Durden

While some argue that Cyprus was "one of the biggest money-washing machines for Russian criminals," and others that Cyprus ex-Pat community and energy resources brough deposits (not to say their high deposit interest rates), it seems the European Union (IMF et al.) have decided that the route to crisis stabilization, just as we outlined here over a year ago and updated here, is through a wealth tax.
However, as Handelsblatt reports, the gross distortions of wealth distribution among both core and peripheral nations (evident in the chasm between 'mean' and 'median' net assets - or wealth) makes some nations more 'capable' of 'giving' and as Commerzbank's chief economist notes, median wealth in Italy is EUR164,000 (as opposed to Austria's median of around EUR76,000 and mean of around EUR265,000) meaning that in theory Italy has no debt crisis (with net assets at 173% of GDP) - significantly more than the Germans at 124% - "so it would make sense, in Italy a one-time property tax levy," he suggested.
"A tax rate of 15% on financial assets would probably be enough to push the Italian government debt to below the critical level of 100% of gross domestic product." So there you have it, the 'new deal' in Europe, as we warned, is 'wealth taxes' and testing the "capacity of Cypriots" appears to be the strawman on what the public will take before social unrest becomes intolerable.

Europe: The Last Great Potemkin Village Where "The Rich Get Richer, And Poor Get Poorer"

From Charles Gave of GKResearch
 
On the surface, it would seem that the euro crisis has calmed. Markets have rallied since the summer and, to borrow a phrase from Herbert Hoover, “prosperity is just around the corner.” But outward appearances in Europe are like a Potemkin village. Behind the well-scrubbed facades, Southern Europe is in a death spiral. Anyone convinced that the European monetary union has come through the crisis stronger is a victim of the slickest PR campaign in history.
...
Let’s be very clear here: this is what the euro has wrought. This destruction of the non-German industrial bases has taken place with the active complicity of the European technocrats. They did not even realize that France, the EMU’s second largest economy, for example was becoming hopelessly uncompetitive.

Let's go one step further. According to the official GDP statistics the French economy since the beginning of the euro experiment has done as well as the German economy: