There's A 40%-50% Chance Stocks Will Crash To A New Low, Says Gary Shilling

Gary Shilling TechTicker

Last summer, 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 said in our TechTicker interview this morning, 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 realises 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.

See why Gary thinks the stock-market may crash to a new low >

Consumer spending is still 70% of the economy, and consumers are strapped. Let's start with unemployment: It's still extraordinarily high

And it's likely to stay that way, because there are so few jobs available

The average number of weeks it takes to find a job has soared to a half-century high

And the folks who have managed to keep their jobs aren't getting paid much more than they were a few years go (especially after inflation)

And here's an interesting point: If Gary's right that GDP is only going to grow 2%, that's bad news for unemployment. We need GDP growth of 3.3% just to keep the unemployment rate stable!

So the employment situation is bleak, which leaves consumers strapped. And they can't borrow money, because the banks are clamping down.

Thus, consumer credit is falling. When you can't borrow, you can't spend.

Source: Federal Reserve

Also, as the value of consumers' assets have fallen (houses, stocks), they've had to start saving more to survive retirement. That's more money they can't spend.

Source: Federal Reserve

But house values will pop right back up to old highs and make consumer flush again, right? No. Because there are still way too many houses.

And more houses are hitting the market all the time, as mortgages go bad and people default.

Check out the number of vacant units for sale... See? There are plenty of houses to go around

To make matters worse, we're forming households at a slower rate. So it will take longer to absorb those inventories

By the way, it's not just houses that we have way too many don't expect corporate spending to pop back, either. Capacity utilization is still very low

And there's plenty of office space

And hotel space

And retail space

And it's not as though the government can keep the current borrowing rates up, so don't look for much help there

Put it all together and Shilling thinks GDP growth will be 2%, not the 4%-5% Wall Street is looking for. So why should stocks still be so expensive?

Gary's answer: They shouldn't.

Source: A. Gary Shilling & Co.

Gary Shilling's recommendations: long Treasuries and the dollar, short stocks and commodities

Can't get enough Gary Shilling? Check out his subscription newsletter at A. Gary Shilling & Co. >

Source: A. Gary Shilling & Co.

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