We had Gary Shilling on TechTicker this morning. We’ll post the video soon.
In the meantime, here’s a quick overview of Gary’s outlook on things, along with a gallery of exhibits from his recent monthly Insight.
- The economy won’t start to recover until 2010 (versus the current consensus of now). It will recover because the government will be forced into a second stimulus.
- The US consumer rules the world…and the US consumer is cutting back fast
- Consumer spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree.
- Most recessions have a positive quarter or two of GDP, so if we get one, it won’t mean anything.
- The S&P will plunge 35% to 600 by the end of the year.
- Buy Treasuries
US consumers have cranked up their spending in recent years, fuelled by a nationwide borrowing binge.
Thankfully, consumers have begun cutting back, but the collapse of other spending has kept their contribution at a startline 70% of the economy.
Over the next decade, consumer spending is probably headed back to 60% of GDP...which will take a big bite out of long-term growth. And not just for the US. For the world!
More than 6.5 million jobs have been lost since the peak.
It's hard to keep spending hand over fist when you don't have a job. (Although many have tried it--and been encouraged to do so by lenders. Oops.)
It takes longer to find a job now than any time since the Great Depression.
Average hours worked each week down sharply year over year (although it has stabilised in recent months!)
30 years ago, those with mortgages owned 50% of the equity in their houses. Now it's less than 20%.
Remember the 'wealth effect'? People spend more when they feel rich?
Well, the reverse is true, too. And people are feeling really poor.
For years, consumers plundered their home-equity ATM machines.
They can't do that anymore. Because the machines are empty.
If house prices bottom down more than 40%, which seems likely, more than 50% of all mortgagors will be underwater--more than 25 million households!
Consumers have started cutting back, and some are even paying off their debts.
Unfortunately, so far, it's just a drop in the bucket.
Long-term, this is good news.
The savings rate might eventually get back to its long-term average of 10% or so, and consumers will eventually repair their own balance sheets.
In the short-term, however, it's bad news for the economy. What gets saved doesn't get spent.
If you don't have stores to manage, you don't need managers to manage them...
Look how big we are! (Aren't you proud?)
Look at those projected budget deficits!
(And they're based on growth assumptions that are still too optimistic)
In addition to newly frugal consumers, Gary Shilling cites four more reasons the economy will grow more slowly than usual over the next decade.
Think 2%-3% per year, instead of the 3%-4% we got used to.
Long-term, if growth is below normal, PE multiples will probably be below normal.
Right now, unfortunately, they're normal.
So we're likely to see more PE multiple compression.
In the short term, meanwhile, Gary Shilling reminds us that most recessions have quarters of positive GDP growth...followed by a resumption of the decline. So even if we get a solid quarter or two, that doesn't mean the worst is over.
And the S&P 500 tends to follow GDP...
Here's a look at the market's behaviour during the 1960-1961 recession.
And same suckers' rallies in the market until the final bottom...
Gary Shilling doesn't think so.
Gary thinks the S&P 500 companies will collectively earn about $40/share this year. Applying a 15X PE multiple to that (average) gets Gary to 600 on the S&P 500. He thinks we'll hit that later this year.
That's a 35% drop from today's level.
Here's hoping Gary's not right again...
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