S&P predicted to Fall by 30%: That’s Gary Shilling’s Forecast


Posted Dec 19, 2008 12:33pm EST by Aaron Task in Investing, Commodities, Recession

The S&P 500 could fall to as low as 600 in 2009 and “alternative assets” like commodities and currencies will provide no shelter for investors, says Gary Shilling, president of A. Gary Shilling & Co.

Having been appropriately bearish heading into this year, Shilling sees “few good places to hide” in 2009. Currently, Shilling is long Treasuries and the dollar, but notes the bond market’s rally is getting long in the tooth.

Other than defensive plays like utilities and consumer staples, Shilling is short stocks. His “S&P 600” prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (vs. the consensus of $83) and the index will trade with a P/E multiple of 15. (Here’s the math: $40 EPS x 15 P/E = 600.)

Shilling is also short commodities and remains bearish on emerging markets, most notably China. The theory China, most notably, could “decouple” from the U.S. doesn’t hold up to scrutiny, Shilling says, as evinced by the slowdown of China’s economy and the fact their middle class isn’t large enough to sustain growth internally.

Against that backdrop, Shilling isn’t only bearish on China as an investment, he sees the potential for major social upheaval in the world’s most populous nation.

Nouriel Roubini warns that the worst is yet to come

RGE Content: Weekly Roundup

RGE Lead Analysts | Nov 1, 2008

On Nouriel Roubini’s Global EconoMonitor, Nouriel Roubini warns that the worst in markets and economies is yet to come.   On October 23rd, Nouriel predicted the potential shutdown of financial markets.   A day later U.S. stock futures suspended trading after declines of more than 6% at opening tripped the circuit breakers.   Nonetheless, Nouriel does not expect another Great Depression, but states that policymakers must act quickly and wisely.

Here are the main elements of Nouriel’s outlook:  Tsunami of corporate defaults;  2-year U-shaped U.S. recession that threatens to turn into an L-shaped one if policymakers do not regain control of the financial system;  global re-coupling to the U.S. will advance from non-U.S. markets to non-U.S. real economies – not even the strongest emerging markets such as Brazil and China will escape global re-coupling;  vicious cycle of deflation in goods markets, labor markets, commodity markets, financial markets, corporate and household earnings, and aggregate demand;  de-leveraging to reduce excess debt in municipalities, households and some firms;  U.S. stock markets declining another 20-30%,  bottoming fall 2009 at the earliest, then moving sideways for years post-recession if growth remains anemic as it did in Japan after its 1990s real estate and equities bust;  U.S. unemployment rise to reach 8-9%;  the demise of the shadow banking system.

According to Nouriel, USD assets, commodities, U.S. and international equities, housing, and the USD are quite risky right now.  Seek safety in cash or cash-like instruments such as T-bills and bonds of safe, large governments.  Though he believes the U.S. dollar will retain its reserve currency status for decades, its status will gradually erode.

Given the size of the expected contraction in private aggregate demand (likely to be about $450 billion in 2009 relative to 2008), Nouriel argues that a fiscal stimulus to the order of $300 billion minimum (and possibly as large as $400 billion) will be necessary to partially compensate for the sharp fall in private aggregate demand.  And don’t miss Nouriel’s testimony before the Joint Economic Committee.

Nouriel Roubini Says You Should Preserve Capital

CNN Money

CNN Money

8 really, really scary predictions

Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market’s sharpest thinkers and what they had to say about the future is frightening.

Known as Dr. Doom, the NYU economics professor saw the mortgage-related meltdown coming.

We are in the middle of a very severe recession that’s going to continue through all of 2009 – the worst U.S. recession in the past 50 years. It’s the bursting of a huge leveraged-up credit bubble. There’s no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it’s all reversing right now in a very, very massive way. At this point it’s not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we’re having a global recession and it’s becoming worse.

Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak – with a growth rate of 1% to 1.5% – that it’s going to feel like a recession. I see the unemployment rate peaking at around 9% by 2010. The value of homes has already fallen 25%. In my view, home prices are going to fall by another 15% before bottoming out in 2010.

For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It’s better to stay in things with low returns rather than to lose 50% of your wealth. You should preserve capital. It’ll be hard and challenging enough. I wish I could be more cheerful, but I was right a year ago, and I think I’ll be right this year too.

Current Downturn Already Longer Than Average

Jobs lost, recession confirmed »
Reflecting a deepening U.S. recession, the unemployment rate climbed to its highest level in 15 years in November as the economy shed more than half-a-million jobs. In other news, the committee of economists responsible for dating the nation’s business cycles declared that the United States went into recession last December. That makes the current downturn already longer than average. For the week, the S&P 500 Index fell -2.2% to 876.1 (for a year-to-date total return of -39.1%). The yield of the 10-year U.S. Treasury note declined 22 basis points to 2.71% (for a year-to-date decrease of -1.33 percentage points). Read morevanguard-ship

Risk of Stagflation vs. Deflation

RGE Monitor

RGE Monitor

  • Roubini: U.S. and global economy are at risk of a severe stag-deflation. A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labor markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1% level that leads to concerns about deflation
  • MS: Inflation will be lower in the near term but there is now high risk of high inflation in the long term. Why? 1) It is doubtful that policymakers will be able and willing to quickly and fully reverse easing when things stabilize. 2) The likely sharp rise in government debt in several countries should increase political pressures on central banks to keep interest rates low. 3) If potential GDP growth has slowed a lot, global recession will not create as much slack and disinflationary pressures as is widely believed
  • JPMorgan: It’s normal for inflation to lag behind growth for quarters after global economy moves from strength to weakness. Slowing growth means slowing inflation eventually. Currency depreciation may lead to higher imported inflation in emerging markets
  • Comparisons with 1970s Great Stagflation:

  • Like the 1970s, 1) inflation was driven higher by commodities with negative supply shocks (though this time coming from poor weather, trade barriers and environmental regulations rather than OPEC) and 2) growth is slowing globally led by U.S.
  • Unlike the 1970s, 1) no wage-price spiral, 2) no Nixonian price controls in the U.S. (but controls do exist elsewhere), 3) commodity price rises also due to positive demand shock, 4) credit crisis and asset deflation in developed world spreading globally, 5) falling inflation in developed world