shilling presentation
TRANSCRIPT
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Investment Strategies for aChanging World
The Ben Graham Centres 2013 Value Investing ConferenceToronto, OntarioDr. A. Gary Shilling
April 10, 2013
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Chart2
1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 20120%
20%
40%
60%
80%
100%
120%
140%
0%
20%
40%
60%
80%
100%
120%
140%
Nonfinancial Corporate
HouseholdState and Local
Federal Government
Financial
Sector Cumulative Debt and Equity Issuance to GDP
Last points: 4Q 2012
Source: The Federal Reserve
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Chart3
Jan-59 Jan-67 Jan-75 Jan-83 Jan-91 Jan-99 Jan-070
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0
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U.S. Personal Saving Rate(Seasonally Adjusted Annual Rate)
Last Point Jan. 2013: 2.4%
Source: Bureau of Economic Analysis
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Chart4
1980 1985 1990 1995 2000 2005 2010-1600
-1400
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Federal Budget Balance
$ Bil.
Source: Congressional Budget Office
Last Point 2012: -1089
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Chart5
0%
1%
2%
3%
4%
5%
6%
Jan-07 May-08 Sep-09 Feb-11 Jul-120%
1%
2%
3%
4%
5%
6%
U.S. Fed. Funds Target Rate
ECB Repo Rate
UK Bank Rate
BOJ Call RateSource: The Central Banks
Central Bank Rates
Last Points: 03/14/13
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Chart6
Jan-07 Oct-07 Aug-08 May-09 Mar-10 Dec-10 Oct-11 Jul-12600
700800
900
1000
1100
1200
1300
1400
1500
1600
600
700800
900
1000
1100
1200
1300
1400
1500
1600
S&P 500 and Quantitative Easing
Source: Thomson Reuters, A. Gary Shilling & Co.
Last Point 03/14/13: 1563
QE1+42%
QE2+24%
Op. Twist+20%
Greece 1
Greece 2 / Fed. Debt Ceil ing
Euro Crisis /Fiscal Clif f
QE3
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Chart7
Jan-08 Dec-08 Dec-09 Nov-10 Nov-11 Oct-120
200
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600
800
1000
1200
1400
1600
1800
0
200
400
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1000
1200
1400
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Required reserves of depository institut ions
Total reserves of depository insti tutions (excess + required)
Required and Total Reserves of Depository Institutions
$ Bil, SALast Points 03/06/13: Required: 115.8, Total: 1764.0
Source: The Federal Reserve
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Chart8
Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Nov-12282
284
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300
302
282
284
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Average Real Weekly Earnings of Private Production
and Nonsupervisory Employees ($1982-84)
Last Point February 2013: 294.29
Source: Bureau of Labor Statistics
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Chart9
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Nov-10 Aug-11 May-12 Feb-1375
8085
90
95
100
105
110
115
120
125
75
8085
90
95
100
105
110
115
120
125
Japanese Yen per U.S. Dollar
Source: Thomson Reuters
Last Point 03/14/13: 96.09
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Chart10
Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12 Feb-1375
80
85
90
95
100
8000
8500
9000
9500
10000
10500
11000
11500
12000
12500
Yen per Dollar - left axisNIKKEI 225 Index - right axis
NIKKEI 225 and Yen Exchange Rate
Source: Thomson Reuters
Last Point 03/14/13 - Yen/$: 96.09, NIKKEI: 12,381
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Chart11
Dec-02 Nov-04 Oct-06 Sep-08 Aug-10 Jul-12500
1000
1500
2000
2500
3000
3500
400
600
800
1000
1200
1400
1600
Total factors supplying reserve funds ($bil.) - left axis
S&P 500 Index Level - right axis
S&P 500 and Federal Reserve Assets
Source: Federal Reserve, Yahoo Finance
Last Point 03/13/13 - S&P: 1555, Fed Assets: 3209
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Chart12
Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12 Feb-1390
100
110
120
130
140
150
90
100
110
120
130
140
150
S&P 500 (US)FTSE 100 (UK)
STOXX 600 (eurozone)NIKKEI 225 (Japan)
Global Stock Exchanges I
Source: Bloomberg
Last Points 03/14/13 - US: 124 UK: 117 EZ: 122 JP: 146
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Chart13
Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12 Feb-1370
80
90
100
110
120
130
140
150
160
70
80
90
100
110
120
130
140
150
160
Shanghai Composite (China)TSX Index (Canada)
ASE General Index (Greece)ASX 200 (Australia)
Global Stock Exchanges II
Source: Bloomberg
Last Points 03/14/13 - CN: 103 CA: 107 GR: 142 AU: 124
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Chart14
Jan-07 Oct-07 Aug-08 May-09 Mar-10 Jan-11 Oct-11 Aug-120%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
Junk Bond Spread vs 20 Yr TreasurysJunk Bond Yield
Source: Bianco Research, LLC,Bloomberg
Junk Bond Yields and Spread vs. Treasurys
Last Points 03/14/13 - Yield: 6.41, Spread: 3.54
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Chart15
Jan-95 Mar-99 May-03 Jul-07 Sep-111
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1
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AA Rated Corporate Bond Yield
S&P 500 Dividend Yield
Yield on Corporate Stocks and Bonds
Source: Haver Analytics, Bank of
America Merrill Lynch
Last Point Feb. 2013 - Stocks: 2.21, Bonds: 2.07
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Chart16
2005 2006 2007 2008 2009 2010 2011 20125%
6%
7%
8%
9%
10%
11%
12%
5%
6%
7%
8%
9%
10%
11%
12%
Chinese Gross Domestic Product
year / year percentage change
Last Point 4Q 2012: 7.9%
Source: Chinese National Bureau of Statistics
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Chart17
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12100
150
200
250
300
350
400
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500
100
150
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450
500
Reuters/Jefferies Commodity Research Bureau Index
Source: Jefferies and Company
Last Point 03/14/13: 296.3
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Chart18
1774 1814 1854 1894 1934 19740
200
400
600
800
1000
1200
1400
0
200
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Real U.S. Commodity PricesCRB Index Deflated by CPI
Source: Bianco Research, Bureau of Labor Statistics,Historical Statistics of the United States
Last Point February 2013: 128.2
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Chart19
1947-I 1959-III 1972-I 1984-III 1997-I 2009-III56%
58%
60%
62%
64%
66%
68%
70%
7%
8%
9%
10%
11%
12%
13%
14%
15%
Compensation of Employees - left axisCorp. Profits with IVA and CCAdj - right axis
Corporate Profits and Employee Compensation
as a percentage of National Income
Source: Bureau ofEconomic Analysis
Last Points 3Q 2012 - Corp. Profits: 14.3%, Employee Comp: 61.6%
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Chart20
1881 1901 1921 1941 1961 1981 20010
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45Last Point February 2013: 22.37
Cyclically Adjusted Stock Price to Earnings Ratio
S&P 500 price /avg. earnings from previous 10 years
Source: Robert Shiller
Average:16.5
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Chart21
Jan-80 Mar-84 May-88 Jul-92 Sep-96 Nov-00 Jan-05 Mar-090
200
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Nominal S&P 500
Real S&P 500 (deflated by CPI, 1982-84 pr ices)
Real and Nominal S&P 500
Source: Haver Analytics
Last Points February 2013 - Real: 650, Nominal: 1512
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Chart22
1871 1891 1911 1931 1951 1971 1991 201110
100
1000
10000
10
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Real S&P 500log scale, February 2013 prices
Source: Robert Shiller
Last Point February 2013: 1512
Bull Bull
Bull
Bull
Bear Bear
Bear
Bear
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Chart23Period Military Engagement No. of Years
Annualized WholesalePrice Change
1749-1755 Peacetime 6 -0.50%
1756-1763 French-Indian War 8 2.27%
1764-1774 Peacetime 11 -0.35%
1775-1783 American Revolution 9 12.31%
1784-1811 Peacetime 28 -1.91%1812-1815 War of 1812 4 7.78%
1816-1845 Peacetime 30 -2.36%
1846-1848 Mexican-American War 3 -0.40%
1849-1860 Peacetime 12 1.05%
1861-1865 Civil War 5 14.75%1866-1916 Peacetime 51 -0.74%
1917-1918 World War I 2 23.92%
1919-1940 Peacetime 22 -2.31%
1941-1945 World War II 5 6.12%
1946-1992 Cold War 47 4.20%1993-2000 Peacetime 8 1.43%
2001-2012 War on Terror 12 2.90%
No. of Years Avg. Price ChangeWartime: 95 5.72%
Peacetime: 168 -1.16%Years Total: 263 1.25%
Historic Inflation and Deflation
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Chart24Long Run Investments to Buy
1. Treasurys and other high-quality bonds.
2. Income-producing securities.
3. Food and other consumer staples.
4. Small luxuries.
5. The U.S. dol lar
6. Rental apartments
7. Health care.
8. Productivity enhancers.
9. North American energy.
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Chart25
Oct-81 Oct-86 Oct-91 Oct-96 Oct-01 Oct-06 Oct-110
5000
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25000
30000
0
5000
10000
15000
20000
25000
30000
25 Year Zero Coupon Bond (Oct-81=100) 23,118 or 18.9% Annual ReturnS&P 500 Total Return (July-82=100) 3,109 or 11.9% Annual Return
Comparative Stock and Bond Performances
Last Points February 2013 - Stocks: 3,109; Bonds: 23,118
Source: Bianco Research & Haver Analytics
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Chart26
1947Q1 1957Q1 1967Q1 1977Q1 1987Q1 1997Q1 2007Q120%
30%
40%
50%
60%
70%
80%
90%
100%
1%
2%
3%
4%
5%
6%
7%
8%
Dividend Payout Ratio - left axis
Dividend Yield - right axis
S&P 500 Dividend Yield and Payout Ratio1947 to present
Source: Standard and Poor's
Last Points 4Q 2012 - Payout Ratio: 35.6%, Dividend Yield: 2.19%
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Chart27
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Nov-10 Aug-11 May-12 Feb-131.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
U.S. Dollars per Euro
Source: Thomson Reuters
Last Point 03/14/13: 1.300
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Chart28
2001 2003 2005 2007 2009 201169
70
71
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77
32
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Homeowners - left axis
Renters - right axis
U.S. Homeowner and Rentersmillions of households
Source: Census Bureau
Last Point 4Q 2012 - Owners: 75.2, Renters: 39.8
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Chart29
2007-I 2008-I 2009-I 2010-I 2011-I 2012-I4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
980
1000
1020
1040
1060
1080
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Vacancy Rate - left axisAvg. Asking Rent ($ / month) - right axis
Source: Mortgage Bankers Association / REIS
Apartment Vacancy and Rental Rates
Last Points 4Q 2012 - Vacancy: 4.5%, Rents: $1,097
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Chart30
1960 1970 1980 1990 2000 20104%
6%
8%
10%
12%
14%
16%
18%
4%
6%
8%
10%
12%
14%
16%
18%
National Health Care Expenditures
as a percentage of GDPLast Point 2011: 17.9%
Source: Department of Health and Human Services
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Chart31
1970 1990 2010 2030 2050 20700%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
Social SecurityMedicare
Medicaid + CHIP + Exchange Subsidies
Social Security, Medicare, and Medicaidas a percent of GDP
Source: Congressional Budget Office,Social Security Administration
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Chart32
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019215
220
225
230
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245
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260
215
220
225
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255
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Without Healthcare Bill
With Healthcare Bil l
Insured Nonelderly Populationwith and without health care bill
Source: Congressional Budget Office
Ch 33
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Chart33
1949 1959 1969 1979 1989 1999 20090%
10%
20%
30%
40%
50%
60%
70%
0%
10%
20%
30%
40%
50%
60%
70%
Total Net Imports
Net Imports excluding Canada and Mexico
Net Petroleum Imports as a % of Supply
Source: EIA
Last Point 2011 - Total: 44.8, Ex. Canada & Mexico: 28.6
Ch t 34
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Chart34Long Run Investments to Sell or Avoid
1. Big-ticket consumer purchases.
2. Credit card and other consumer lenders.
3. Conventional home builders and suppliers
4. Selected banks and similar financial institutions
5. Junk securities
6. Commodities
7. Developing country stocks and bonds.