5 Themes Spawning Winners, Losers in the New Global Economy

With the lockdowns caused by COVID-19 and working from home, office buildings in big cities remain less than 50% occupied and landlords continue to feel intense pain. Midtown Manhattan is especially hard hit, with offices housing barely one-third of their pre-pandemic workforces, according to Kastle Systems. Spending by office workers has nosedived. So has work for employees who service office buildings.

3. Many homebuilders were wiped out by the 2008 subprime-mortgage collapse and the survivors turned cautious.

The supply of single-family abodes had failed to keep up with exuberant demand and prices leaped. But homebuilders have regained their confidence. Government data show more housing under construction than any time since the early 1970s.

Meanwhile, existing home sales fell 7.2% in February from January and 2.4% from a year earlier. Rising mortgage rates and higher prices are taking their toll. In February, the share of first-time homebuyers fell to 29% from 31% a year earlier.

The recent single-family housing bubble is not as extreme as the subprime mortgage bonanza of the mid-2000s, but its bursting will generate many losers including overleveraged homeowners, residential real estate brokers, mortgage bankers, home furnishing stores and movers. Renters will probably be better off than homeowners, and landlords of rental apartments and single-family houses will also be winners.

With average house price declines of 10% to 15% likely, state and local governments that depend heavily on real estate taxes will be strained, the reversal of now when robust revenues are inducing some to cut taxes. Prospective first-time homebuyers and renters will have the advantages.

4. The Federal Reserve's aggressive credit-tightening campaign will likely precipitate a recession, with equities suffering 30% to 40% declines from their early 2022 peak.

In view of all the zeal for cryptocurrencies and other speculations, declines in prices of financial assets may be widespread. The recent high volatility in major stock indexes is an ominous sign, as is the inverted yield curve. Growth stocks' current share prices, many believe, are the discounting value of future earnings, so with rising interest rates, their present values fall.

The major bear market, which appears to be underway, will result in many losers, especially holders of speculative equities and those with high financial leverage. Institutions that manage equity portfolios will also suffer as their management fees fall and investors flee to cash. Short sellers will prosper. Defensive stocks such as consumer staples and utilities will probably hold up better than average, but still are likely to decline in price.

5. U.S. government securities have suffered substantial price declines this year as interest rates have risen in anticipation of tighter monetary policy.

Still, the rate increases since December may have discounted the Fed's entire credit-tightening binge. The jump in the 10-year Treasury note yield from 1.34% in December to a recent 2.8% implies a rise in the target federal funds rate to 4% from the current 0.25% to 0.5% range. Getting to that level would require about seven 50-basis-point hikes in the Fed's policy rate, and credit-tightening of that magnitude would no doubt precipitate a major recession.

Once the Fed realizes that it has caused a recession, it will reverse gears and ease credit, probably even before the peak in business activity as it did in the last four cycles. Treasury notes and bonds would then rally as credit demand and inflation rates drop, and investors once again flock to the haven of government obligations.

Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation." Some portfolios he manages invest in currencies and commodities.

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