Customer Reviews

Deflation: How to Survive and Thrive in the Coming Wave of Deflation

5 star:		(7)
4 star:		(1)
3 star:		(2)
2 star:		(2)
1 star:		(0)

 

 

I bought a bunch of investment books while on vacation, and this book by Gary Shilling was the last to be read only because of its relative size. First I looked at the date it was written, then thought about what he was saying, especially in his look-ahead comments, and he was "spot on" about today's environment. As a result, I moved 100% to the sidelines at the end of July, 2001, and have been smiling ever since. I then asked my wife to read it, and we both agree that Gary is most accurate in his assessment of economic trends. I was so impressed that I purchased his monthly "Insight" report. The book is a "must read", especially for those nearing retirement and must conserve their capital.

I read this book years ago just when it came out (mid 90s). I did not pay that much attention afterwards. I thought at the time, it was mildly interesting. Man was I wrong. This book was right on the money half a decade ahead of time. In his book, he depicted perfectly well all the trends that would lead to a rather formidable deflation factor. At the time he wrote the book, Japan was probably close to entering its deflationary phase. But, no other country was. The rest of the World's central bankers were still busy fighting inflation.

Now, the picture has changed radically, and Gary Shilling anticipated current economic times perfectly

The author predicts certain economic conditions when the book was published in 1999. A stock market pullback has since happened. Rents in the Boston Market have declined for the last two years. Deflation pricing on goods that can be manufactured in the 3rd world. Quite remarkable.

He's wrong on some of the trigger mechanisms and admits that he may be. (Who could have predicted 9/11, or when the fed would raise rates..., or the bond rally causing a current real-estate bubble.)

Other authors try to scare you with hype or wave theory garbage. This book backs things up with hard data and graphs from different economic periods that run similarities. Then he explains the mechanisms at work that will drive the deflationary process. Also explains how much of it is beyond the control of the feds short term rate mechanisms.... Could be why the fed isn't jawing about it, just hoping it won't happen.

Five stars, read it. If it happens, you'll be prepared. If it doesn't happen, you'll be better educated anyways.

This is a good book, but it is in need of a serious rewrite. Originally published in 1999, it misses the following events:

* Stock market calamity in 3/2000 and subsequent decline
* 9/11
* corporate accounting scandals
* The multitude of interest rate cuts
* Real Estate bubble
* War on Iraq

As a result, a lot of the information in this book has to be interpreted with these events in mind. For instance, a whole chapter is devoted to "The Strengthening Dollar" - which may have happened had the landscape not changed so drastically. Another example is a mention of Enron as an example of a company that might be a winner in the electric utility industry as utilities are being deregulated.

The above is not intended to be a slight on the author or the book. Who could've foreseen the events above? The point is that the landscape has changed a lot since this book was originally written.

While this book is very much a re-publication of his original "Deflation" book, Gary has cut back on the number of graphs and charts, and added new content on recent developments.

While at first I wasn't too pleased to be re-reading the original book in new packaging, I found it very valuable to review the numerous points Gary makes along with some updates on his insights.

This book is currently the best on the subject and makes a lot of sense. Some have argued that Gary is out to lunch, but he is the only one I know who is prepared to address these issues intelligently.

And for those who complained that "Deflation" did not have an index, they'll be pleased to know that this McGraw-Hill edition does!

This book argues that deflationary forces in the world economy will overcome inflationary ones. Dr. Shilling cites shrinking government spending, a declining role for central banks, mergers and restructuring of businesses to be more efficient, efficiency for new technologies, lower prices from Internet-based competition, deregulation, increased outsourcing and use of third-world countries for first-world activities, a strong dollar, structural problems in Asia, the need for older Americans to save more, and the likelihood of a stock market crash.

There is an excellent section on what a world economy experiencing deflation will be like. The key problem is that deflation encourages people to defer spending, which slows down economic growth and stimulates more deflation.

The final sections describe investment and business strategies for deflation.

Why, then, did I grade the book down two stars? First, because the case for deflation is so oversimplified as to be improbable. The extremely rapid growth of the New Economy will create inflationary pressures on much of what it touches (from skilled employee wages to room to house its operations). And the New Economy will inevitably expand the stock market rapidly, because the growth rate of new technologies is expanding.

Second, Dr. Shilling failed to explain that deflation can exist side-by-side with healthy inflation, and that you will have to shift agily to deal with both simultaneously. I thought each mistake was so obvious and basic as to be worth the loss of one star.

Even economists realize that economists cannot forecast the economy . . . or stock prices . . . or interest rates. So why are books by economists concerning the future of economic factors of interest? To me, these books provide scenarios of possible futures that we can each use to test our personal and business strategies.

But certainly it was startling to see all of the charts about rapidly declining commodity prices, that end just before commodity prices took off last year. It was equally startling to see descriptions of future increases in savings, just before the savings rate went even more negative in the U.S. In other words, the scenario is coming unglued a little in 2000. What does that mean?

I think where Dr. Shilling misses the point is in the implications of having a two-tier economy, a rapidly-growing, technology-based one and a traditional one. The rapidly-growing one creates shortages which drive up prices (witness office rents in high tech parks and housing prices where technologists live) while the traditional one experiences deflation that reduces interest costs to make the shortages worse (making housing prices higher and driving up p/e levels for those companies with rapid growth).

He also misses the point that although we have way too much world capacity in many industries like steel and autos, we have too little in some areas (like electrical generating capacity in California, petroleum production capacity in the Middle East, and certain types of telecommunications gear). Whenever we run into a shortage of something essential, prices can quickly go through the roof. This sets off the cycle of expanding profits, more consumption, higher stock prices, and renewed modest inflation.

His third major error is in being off on his timing of when Baby Boomer consumption will turn into savings and lower expenditures. What he misses is that Baby Boomers for the most part report that they do not plan to retire. So they see less need for savings now. Also, if you read Harry Dent, you will know that the Baby Boomer spending wave is scheduled to last about another 8 years in the United States before doing what Dr. Shilling forecasts.

Realizing that I am even more likely to be wrong in forecasting than Dr. Shilling is (as a mere management consultant), my suggestion for you is that you test your personal and business plans against how well they would do in deflation, low inflation, and high inflation. Any action that would work well in all three is probably going to be a winner. Investments in the most rapidly advancing areas of technology work in all cases, for example. On the other hand, bond investments (favored by Dr. Shilling) work outstandingly well only in deflation.

There is one complication to keep in mind. Your investments may be affected by inflation or deflation, but your business might be affected by the opposite. For example, if you are in an old-economy business, you may be wracked by deflation. But your need to hire software engineers may be affected by inflation. And your investments in bonds could be hit by either inflation or deflation. Naturally, if you have a choice, move into the promising areas, leaving the old economy behind except as a source of cheap goods and services.

After you have finished your thinking about how robust your personal and business strategies are in various combinations of inflation and deflation, ask yourself for what other factors you should do similar scenario-based thinking. Consider whether faster or slower rates of technological change could be another such variable. Then repeat the process. As a result, you can create much more irresitible growth for yourself and those you care about.

This was a very good read. For the most part, well-documented. I question his basis for steady or growing productivity in the current economy. I found that Leeb's book "Defying the Market" made for a very good counter-point to this book -- although, some of the conclusions are frightenly similar. Bottom-line: If the market crashes, deflation(most likely "good deflation")could be the outcome. Stocks are out, bonds are in!

I read Gary Schilling's first book about Deflation in the late 1990's when everyone else was focused on the tech boom and INflation. Needless to say it was a different read but it was very valuable to me as I was about to retire and I wanted the fullest possible perspective before making some key decisions. [I am a retired banker with an advanced degree in finance, but we all need help at retirement!]
It was very valuable to me, challenging me to focus on the key issues for my particular situation.

Of course this was all pre-9/11 and the war on terror and the 2008-09 financial meltdown. So I was very interested in an update, especially given the difficulties in Europe and Japan, and America's overspending and debt problem.

Again, this was a good and valuable use of my time but the book is way too long, with more than a third of it devoted to describing "great calls" Gary has made in the past. This bugged me for two reasons:
1. Most people who read this kind of stuff do so because of the author's track record; he's got a good one.
2. Some of it seemed like "score settling".
If this is your first Schilling book you may find these discussions to be useful because they establish his record as a analyst with an independent view, but if you already know that about him, it's tiresome.

Having said that, wading through it all is still very worthwhile because the analysis is backed up with data, the trends identified are important, and he gives advice on action steps.

Just be sure you don't bet everything on any one economist's views, even Gary Schilling!

The titles for this 1999 book are funny, which is why I give it 5 stars. In his 2011 book he discusses at length how great a forecaster he is....and repeats the same things this book.

Chapter 1 "Government Spending is Shrinking"
Chapter 11 "Slow Recovery in Asia"
Chapter 26 "Avoid Commodities and Real Estate"

Now take a look at what the government spent in 1999 compared to now, what Asian markets have done since he wrote chapter 11, and where commodities are today. Even housing has done better than he might have thought, still up 40% or 50% since then.

He wasn't wrong on everything. For example, if you had put all your money in a 7% 10 year treasury you would have beat Warren Buffet by a little. But you would have lost half your money in terms of commodities and Asian markets. Jim Rogers got it right starting in 1998, and he says this commodity boom has at least 5 more years, maybe 10. I'm willing to bet a lot that Jim Rogers still has it right, and that Gary Shilling will not beat Warren Buffet over the next 10 years with bonds. But I agree housing is going to stay a lot lower for a lot longer than people think.

Having left Wall Street over a year ago I am amazed at how little attention the media, Wall Street & the Fed have given to Deflation. In my opinion the probability of a deflationary scenario is higher than ever. This book helps you prepare for such tumultuous economic times. I rank it a 5 star book, an increasingly rare rating for me. I gave this book five stars due to the excellent analysis and insightful commentary about what occurs in deflation and, more importantly, the graphical depictions the book has throughout it. It would be ignorant to mention that Mr. Shilling has been talking about deflation non-stop since the late 80's - especially after the '87 stock market crash. Can anyone remember the story about the boy who cried "WOLF!" too many times?

Talking finance without graphs is tough for the reader so I give kudos to Mr. Shilling in this regard.

As I like to say (and Mr. Shilling points this out), the 1980's was the age of government spending. The 1990's was the age of the consumer buying binge as individual debt levels have soared. The average person has $8500 in credit card debt vs. 2500 in 1990 to put it into perspective.

Moving forward, what will drive top-line growth in worldwide sales? - Did you know that the G-8 countries account for roughly 80% of total purchases worldwide and, as a result, weakness in those countries dramatically affects the world economy?

Will we end up with too much capacity due to stagnant growth or a retraction in corporate spending?

What will be the catalyst to drive economic growth? - The government has over $5 trillion in debt, corporations and individuals are tapped out and factories are running at about 76% of their utilization right now.

Buy the book........Read the book........Anyone can learn from this........By the way, bond prices have already soared so the easy money in bonds has been made.........

...If you are interested in economic history book I would encourage everyone to read The Worldly Philosophers by Robert Heilbroner since it is more international in scope and deals with the lives and times of the most famous economists in history. If you are interested in economic development I would encourage you to read Hernando DeSoto's Mystery of Capital but note his lack of focus on corruption in certain countries. A great general business book is by the management guru Peter Drucker entitled "The Essential Drucker."