40%-50% Chance Stocks Will Crash To New Low, Says Gary Shilling

Last summer, our guest Gary Shilling of A. Gary Shilling & Co. predicted that stocks would fall 30%.  That hasn’t happened yet, but the extraordinary bull run that made idiots out of many of Wall Street’s greatest gurus last year has now finally reversed, and Gary is sticking by his bearish guns.

At Dow 10,000, Gary says, stocks are still priced to reflect a strong economic recovery throughout 2010 and 2011.  And that’s not going to happen.  Consumers still account for more than 70% of the spending in the U.S. economy, and consumers are retrenching.  The value of their assets has plummeted, so they’re finally saving again.  They’re unemployed.  They’re tapped out.  Put all that together, and consumer spending will continue to be weak, and the overall economy will only grow 2% a year.

When the market finally realizes that its dream of a v-shaped recovery is too optimistic, stocks will go lower–perhaps much lower.  In fact, Gary thinks there’s a 40%-50% chance they’ll crash right through the bear-market lows set last spring.

So what’s an investor to do?

Buy Treasury bonds, Gary says.  Contrary to the concerns of they hyper-inflation crowd, the world is awash in excess capacity.  We have too much production capacity, too many houses, too much labor.  Overcapacity leads to deflation, not inflation.  So today’s 4.5% long-term Treasury yield will go to 3%, making bondholders 25% in the process.

And buy the dollar.  At the end of last year, everyone agreed that the dollar was going to continue to collapse.  That was your queue to get the heck out.  It’s not that we don’t have serious problems with deficits and debt in the U.S., Gary says–it’s that our problems are less bad than the problems facing the Euro.  Gary thinks the dollar will rise back to parity with the Euro, a major move from the ~$1.35 it takes to buy a Euro today.

And sell commodities.  China is overheating, and as it corrects, it will take global commodity demand down with it.

In short, Gary says, do exactly the opposite of what everyone was telling you to do at the end of last year.

Buffett Says, We Are Doomed – We’re Going to Be Crushed Under A Mountain of Debt

A highly influential American has finally hit the panic button about the tremendous mountain of debt the country is piling up.Last year, Warren Buffett says, we were justified in using any means necessary to stave off another Great Depression. Now that the economy is beginning to recover, however, we need to curtail our out-of-control spending, or we’ll destroy the value of the dollar and many Americans’ life savings.Some not-so-fun facts from Buffett’s editorial today in the New York Times: * Congress is now spending 185% of what it takes in * Our deficit is a post WWII record of 13% of GDP * Our debt is growing by 1% a month * We are borrowing $1.8 trillion a year$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year and Americans save a remarkable $500 billion and lend it to the government, we’ll still need another $900 billion.So, where’s it going to come from? Most likely the printing press. And, ultimately, Buffett says, that will destroy the value of the dollar.

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Robert Prechter Says Dollar’s Hit a “Major Bottom”

Forget all the talk about the dollar being in terminal decline. The recent rally in the greenback is for real, says Robert Prechter, president of Elliott Wave International. The man who correctly predicted the 1987 crash and last year’s peak in oil prices now says we’re “going to be up for a year or two in the dollar.”Reuters and other mainstream news outlets attribute the recent uptick in the dollar versus other major currencies to an improving economy signaled by Friday’s “stronger-than-expected U.S. jobs numbers.” Prechter, ever the contrarian, says the U.S. dollar has put in a major bottom but not for the reasons everyone else is pointing to.

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Slumping Treasury bond prices send stocks lower – Yahoo! Finance

Slumping Treasury bond prices send stocks lower – Yahoo! Finance

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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.