Please don't be misled by the recent excitement over the banks $25 billion dollar deal to pacify homeowners. Banks are far from being out of the woods when it comes to the mortgage crisis.

I am sorry to report that the global economic outlook is getting darker by the day. I have been pounding the table about this in my newsletter and in my Forbes magazine columns for some time now. The European debt crisis continues to cause international financial markets to struggle mightily. Investors are still questioning the global banking system.

Here at home, unemployment is still high and economic growth continues to be weak. In the coming months I expect strapped consumers to pull back on their spending. Housing remains in the dumps. Meanwhile, most major stock indices here and abroad were down last year.

One reason why the stock market was able to double from its bear-market lows in 2009 through the early months of 2011 is that the U.S. government and the Federal Reserve were able to act as ‘lenders of last resort’ to big banks and brokerages that would have otherwise gone bust.

If it’s our own government that needs a bailout, who can supply it?

The stock market's decline is already providing the unpleasant answer to this troublesome question.

>Gary Shilling was mocked for predicting a housing crash back in 2006, but he and his subscribers cleaned up during the bear market. Click here for Gary's current take on the housing sector in Insight.

Given these forecasts, here are my 20 investment themes for 2012, which you can read about in great detail when you subscribe to my Insight newsletter.

On the favourable side, first up are my all-time favourite, 30-year Treasury bonds. A year ago, I forecasted a drop in the yield on the 30-year Treasury bond from the then-4.4% to 3%. The 3% yield was indeed reached and even breached in late 2011, providing a splendid 33% total return on a 30-year coupon-paying Treasury.

Other areas on the favourable side of my 2012 investment themes include elected income-producing securities; small luxuries; consumer staples and foods; selected health care providers and medical office buildings; rental apartments; productivity enhancers; North American energy producers and the U.S. dollar.

The dollar in the long run is likely to remain the world’s primary international trading and reserve currency because of rapid growth in the U.S. economy and in GDP per capita, promoted by robust productivity growth. Furthermore, the U.S. has the world’s biggest economy and its financial markets are broad, deep and open. There are also no substitutes for the buck in the foreseeable future. And the dollar, despite the recent downgrade of Treasuries by Standard & Poor’s, retains considerable credibility. In addition to these long-run factors, the greenback is the global safe haven in the current worldwide sea of trouble.

On the unfavourable side, my list of 2012 investment themes includes developed country stocks. This is a new theme for 2012 that reflects my forecast of a major recession in the euro zone and the U.K., a hard landing in China and at least a moderate recession in the U.S., all culminating in a turndown in global economic activity accompanied by financial crises of unknown depth. Reinforcing this conviction is my belief that the U.S. and other developed economies are in a secular downswing that started in 2000, which is accompanied by a secular bear market in equities.

The rest of the unfavourable for 2012 include homebuilders and related companies; consumer lenders; big-ticket consumer discretionary equities; banks; homes for sale; junk securities; old tech capital equipment producers; developing country bonds and stocks; and selected commodities.

Commodities will probably continue to decline in 2012 as they did last year. The CRB broad commodity index was down 7%. Agricultural commodities such as sugar and cotton fell from their early 2011 peaks and declined for the year as a whole. Corn prices were about flat in 2011, but wheat and soybeans fell. Copper dropped 23%, no doubt anticipating a global decline in industrial production since copper is found in almost every manufactured good, as well as a hard landing in China, which consumes 42% of annual copper production. I doubt that the commodity price decline in 2011 fully anticipated the global recession I foresee this year, so further significant declines are probably in store.

My investment themes for 2012 are based on my economic, financial and political outlooks for this year as well as on my long-term forecast. After all, this year is just the first step in the long-run journey that will continue to be dominated by The Age of Deleveraging, as discussed in detail in my recent book with that same title. This age, which began in 2007 and probably has another five to seven years to run, is dominated by the unwinding of the immense debt—built up by financial institutions globally starting in the 1970s, by U.S. consumers commencing in the early 1980s and, more recently, by governments as recession-weakened revenues and immense fiscal stimuli hyped their deficits and borrowing.

U.S. real annual GDP growth in future years is likely to be held to 2%, compared to the zero growth since the fourth quarter 2007 business peak and the 3.7% annual growth in the 1982-2000 salad days, thanks to this and eight other forces:

1. U.S. consumers will shift from a 25-year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.

2. Increased government regulation and involvement in major economies will stifle innovation and reduce efficiency.

3. Low commodity prices will limit spending by commodity-producing lands.

4. Developed countries are moving toward fiscal restraint.

5. Rising protectionism will slow—even eliminate—global growth.

6. The housing market will be weak due to excess inventories and loss of investment appeal.

7. Deflation will curtail spending as buyers anticipate lower prices.

8. State and local governments will contract.

Sincerely,

Gary Shilling
Editor
Insight

Dr. Shilling is the President of A. Gary Shilling & Co., Inc., the editor of A. Gary Shilling's Insight and a long-time Forbes Magazine columnist. Besides Forbes, his articles appear in The Wall Street Journal and The New York Times, among others. He is a member of The Nihon Keizai Shimbun (Japan Economic Journal) Board of Economists and appears frequently on radio and television business shows. Recognized as an effective and dynamic speaker, he often addresses national and international conventions of various business groups, including the Young Presidents Organization.

Dr. Shilling is well known for his forecasting record. In the spring of 1969, he was among the few who correctly saw that a recession would start late in the year. In 1973, he stood almost alone in forecasting that the world was entering a massive inventory-building spree to be followed by the first major worldwide recession since the 1930s. In the late 1970s, when most thought that raging inflation would last forever, he was the first to predict that the changing political mood of the country would lead to an end of severe inflation, as well as to potentially serious financial and economic readjustment problems, and a shift in investment strategy from one favouring tangible assets to an emphasis on stocks and bonds.

Gary Shilling received his bachelor's degree in physics, magna cum laude, from Amherst College, where he was also elected to Phi Beta Kappa and Sigma Xi. Earlier, as a high school senior, he ranked 12th in the nation in the Westinghouse Science Talent Search. Dr. Shilling earned his master’s degree and doctorate in economics at Stanford University. While on the West Coast, he served on the staffs of the Federal Reserve Bank of San Francisco and the Bank of America.