If you followed Gary Shilling’s advice for the last 30 years, you would be very wealthy.

Shilling runs the New Jersey-based economic consulting firm the bears his name, A. Gary Shilling & Company, and he is the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, published in 2010. He spoke last week at the Boston Security Analyst Society asset allocation conference in Boston.

Since 1981, Shilling has consistently advocated owning long-dated Treasury securities. In his talk, he reiterated that advice as one piece of his three-part asset-allocation strategy for the coming year.

In 1981, Shilling said we were “in for the bond rally of a lifetime.” Since then, a strategy of rolling a 30-year zero-coupon bond outperformed the S&P 500 by 6.3 times.

Shilling’s thesis was centered on the macro-economic theme that has underpinned his recommendations for the last 15 years: deflation. Shilling’s previous book, Deflation: How to Survive and Thrive in the Coming Wave of Deflation, was published in 1998.

Let’s look at what Shilling said is going on in the world and what he said it means for portfolios.

The global landscape

Since 1749, according to Shilling, inflation during wartime periods has averaged 5.6%, aided in part by aggressive government spending. But during peacetime, productivity growth has kept inflation low or nonexistent. Military spending is approaching a post-war low, he said, and deflation is imminent.

“We would have had it sooner,” he said, “had it not been for massive monetary and fiscal stimuli.”

Shilling said policies are heading other way: taxes have increased, higher taxes are being collected due to an improved economy and the 2009 stimulus package has worn off.

“Now we have fiscal drag, instead of fiscal stimuli,” he said.

Slow growth underlies our economic woes, Shilling explained, and it is due to continuing deleveraging following the financial crisis. It normally takes a decade for deleveraging to complete following a crisis, he said. We are eight years into it, and “it may take more than two more years.” Meanwhile, the U.S. economy is operating at a “half-speed expansion”

Meager wage growth is dampening growth, according to Shilling. Profit margins have shot up, but only through corporate cost cutting. That’s fine for businesses, he concedes, but the flip side is depressed wages and income. The bottom 90% of wage earners have paid the highest price, he said. Median real wages have been basically flat since the financial crisis, according to Shilling. Without increased consumer spending, slow growth and deflation are certain.

“There is no other factor in the economy that can spur growth,” he said.

Shilling doesn’t expect the rest of the world to drive U.S. growth. China is slowing, he said, and its reported 7.3% growth should not be trusted. China’s PMI numbers are declining and reelectricity consumption is growing at only 4.3%. Japan has been in deflationary depression for 20 years, he said, and is in depression now. Europe is barely growing.

Slow to negative growth on a global basis leaves three results: declining commodity prices, deflation and competitive devaluations.

Declining commodity prices

According to Shilling, the CRB commodity index has been declining since early 2011. It surged in 2002 when China joined the WTO, but since then, China has been consuming a large percentage of global natural resources. As a result, commodity producers expanded production – for example, Brazil built readied copper mines– and closed the gap between supply and demand.

Declining commodity prices are not a new phenomenon. Shilling said that since mid-1800s prices have been declining despite spikes coinciding with wars, and excess demand has consistently been met by improvements in technology.

“Human ingenuity beats shortages,” he said, “always has, always will.”

Shilling admonished some in the audience who raised their hands when he asked if commodities are an asset class. “They aren’t,” he said, “at least on the long side.”

Awareness that commodity prices were in a secular decline was limited, he said, until crude oil prices “went off the cliff.” Cartels are formed to keep prices above equilibrium, Shilling said. The role of the lead member of a cartel is to deal with cheaters by cutting back on its supply. The Saudis got tired of playing that role, he said. Shilling disagree with the popular belief that the Saudis are trying to “put a hit” on the American fracking industry by lowering oil prices. Instead, he said, the Saudis are playing a game of “chicken” – lowering prices to penalize cheaters.

How low can oil prices decline? Saudi Arabia supposedly needs $90/barrel to balance its budget, but Shilling said that the prices that oil producers need to balance their budgets are irrelevant. It’s not the “full cycle” cost of producing energy that matters, either. The “chicken-out price” is the marginal cost of producing oil, according to Shilling. (Some countries like Russia, however, will continue to produce oil below marginal cost because they need the foreign currency).

The “chicken-out price” is $10 to $20/barrel for the Saudis, he said, about the same as it is for existing fracking operations.

“We really have a long way down before someone chickens out,” he said.

Read the rest at Advisor Perspectives.