Another dark and scary forecast by Gary Shilling

[cashflo2u2]

This guy has been pretty correct on his predictions about this mess we are in. His conclusion in this is that a S & P 600 (15 X $40 S&P earnings) is coming in 2009.

Semi-Annual U.S. Economic Outlook: Collapsing On Schedule - John Mauldin's Outside the Box - InvestorsInsight Publishing

[Martha]

Poop on Gary.

And before Dawg54 get here:

[dex]

John Mauldin has been saying the same thing for about 15 years or so - I used to read him but it just got so repetitive, I stopped.

[Zathras]

Well, eventually he had to be right

[Dawg52]

Quote:

Originally Posted by Martha Poop on Gary. And before Dawg54 get here:

Well played.

[John Galt III]

The doom and gloom prognosticators are saying the "other" credit problems out there are worse than the subprime stuff, and the "other" credit problems are going to crash down on us in 2009. Regular mortgages that folks are defaulting on, commercial retail loans that are going to be defaulted on, due to no customers in stores, credit cards being defaulted on, and car loans.

One of these gloomers correctly predicted , way back when oil was at $65 a barrel or so, that "they" (the people pulling the strings) wanted oil to go up to $150 a barrel. He was right !! It went up to $149, right? I think it was Gerald Celente who made the $150 oil prediction, but might have been Jerome Corsi. Not sure.

These guys have some "way out there" theories too, like popular revolution of some sort, violent or non-violent, by the working folks who finally say "enough", in 2009.

They're also predicting DOW going down to around 5,500 or so, in 2009.

Celente says Feb, 2009 is going to be when everyone sees how horrible the situation really is. Lots of fresh bank failures, and runs on banks.


I hope they are wrong. But I have a feeling they are right. That prediction of $150 a barrel oil impressed me.

On the happy side, one other prognosticator type of guy on the radio said he thought there would be a recovery starting in 2nd quarter of 2009 !!

[lazygood4nothinbum]

Quote:

Originally Posted by cashflo2u2 Semi-Annual U.S. Economic Outlook: Collapsing On Schedule - John Mauldin's Outside the Box - InvestorsInsight Publishing

so much is point of view...and then there's reality.

Quote:

At present around 12 million homeowners, a quarter of those with mortgages, are underwater with their houses worth less than their mortgages. Among those who bought their homes in the past five years, 29% are underwater. If our forecast of a 37% house price fall is reached, about 25 million, or almost half the 51 million with mortgages, will be underwater. Adding in the 24 million who own their houses free and clear, and one-third of the total will be in trouble.

my guess is that most people would think that pretty pessimistic.

but at this point, i'd be delighted if our values here came back up to having had fallen by only 37%.

[Architect]

I subscribe to his monthly newsletter which that was taken from - worth every penny. What makes it so good is he details his reasoning, and shows the data behind every assertion, in 40-50 pages/month. And he makes frequent non consensus calls which can be very lucrative. But the value in the newsletter is after reading it a couple of years you get a good understanding of macroeconomics and how it relates to investing. He's sometimes wrong, but mostly right, and the knowledge gained is invaluable.

For example, his Stanford PhD thesis was on the relationship between debt and GDP growth, and he updated that work a few years ago. I don't have the numbers handy, but over the last 100 years it's taken (say) $1 of debt to produce 30 cents of GDP growth. But guess what, starting in 1982 (at the beginning of the credit bubble) that long trend went out of wack, in 2007 it was seven times that number, which had never happened before. Clearly the economy was getting drunk on credit, and it took more and more of the 'credit drug' to get the patient high. That was just one of the indicators that the credit bubble was finally about to burst.

He also did an analysis of the U.S. consumer. It was exhaustive - and trust me, they're toast.

[cashflo2u2]

Quote:

Originally Posted by Martha Poop on Gary. And before Dawg54 get here:

Yeah, I like that! Let's all poop on Gary! I've seen him on Larry Kudlow show and always wanted to poop on his bald head.

[dex]

Quote:
At present around 12 million homeowners, a quarter of those with mortgages, are underwater with their houses worth less than their mortgages. Among those who bought their homes in the past five years, 29% are underwater. If our forecast of a 37% house price fall is reached, about 25 million, or almost half the 51 million with mortgages, will be underwater. Adding in the 24 million who own their houses free and clear, and one-third of the total will be in trouble.
==========
Think about this for a second:
The day someone buys a house they are underwater versus the market price of that house if they wanted to sell immediately.

Sale price of house
Less Closing Costs
Less Real Estate Sales commission.

A home bought today and if from today homes appreciated by 1% per year it would take aprox 9+ years to break even - (assumes 3% closing costs and 6% real estate sales commission).

Today we can add the market decline to the above calculation. As with stocks it isn't a loss until you sell. The information in the quote is saying that those that sell for less than they bought will incur a loss. What it does not say is when those people will sell and if they can absorb the loss. The article infers or alludes to that the people underwater will just stop paying their mortgages and walk away just because they are underwater all around the same time causing huge economic harm.

Yes, if you lose your job and can not make the payment you might walk away.
But if you do not have a reason to sell you might just stay where you are.

The above quote annoys me.

[lazygood4nothinbum]

suppose, even after working off the excess, ya still have a three year inventory of homes for sale, and say, i'm just guessing, 30-50% of that is distressed. and of course those not distressed still must compete with the lower prices so they might not be distressed but they can only command distressed pricing. now once all that is finally sold off, if ever, does the market simply spring back?

just how does deflation work? does it set a new basis?

[barbarus]

Quote:

Originally Posted by lazygood4nothinbum suppose, even after working off the excess, ya still have a three year inventory of homes for sale, and say, i'm just guessing, 30-50% of that is distressed. and of course those not distressed still must compete with the lower prices so they might not be distressed but they can only command distressed pricing. now once all that is finally sold off, if ever, does the market simply spring back? just how does deflation work? does it set a new basis?

Come on now.

Where are all of you optimists with your cries of "tin-foil hat" for Mr. bum's intelligent observation? (A year ago, they would have torn you apart on this blog lazy).

Have any of you caught on to what a scam finance has been on the Street for years now? Who cares, as long as that 401k has been getting fatter, no?

How many ERFers actually participated in some of this chicanery?

Maybe you'll be visited by the ghosts of economics past, present and to-be come Tuesday evening.


I'd like to wish a Merry Xmas to Bernie Madoff while I'm at it. He seems like the perfect fellow for the soon-to-be-vacant Hank Paulson position. They just don't make 'm any finer now, do they?

I'm tempted to go back to my old signature about how they make a new sucker every minute....except the suckers drag down the prudent with them.

[riskadverse]

Quote:

Originally Posted by lazygood4nothinbum ...and then there's reality. . . . Adding in the 24 million who own their houses free and clear, and one-third of the total will be in trouble. . . .

Please explain. If they own their houses free and clear, why would they be in trouble?

[cashflo2u2]

I didn't realize Architect posted a Gary Shilling video interview on this subject under his post "S&P 500 in 2009". You can see and hear his explanation in this post.

[ziggy29]

Quote:

Originally Posted by riskadverse Please explain. If they own their houses free and clear, why would they be in trouble?

I think you misread it.

The quote was:

Quote:

At present around 12 million homeowners, a quarter of those with mortgages, are underwater with their houses worth less than their mortgages. Among those who bought their homes in the past five years, 29% are underwater. If our forecast of a 37% house price fall is reached, about 25 million, or almost half the 51 million with mortgages, will be underwater. Adding in the 24 million who own their houses free and clear, and one-third of the total will be in trouble.

The ones who own their homes outright *reduce* his gloomy forecast. Note that he referred to 25 out of 51 million households with mortgages being "underwater" (or about 49%). Adding in 24 million more households with paid-off homes who do not have underwater mortgages, that's 25 out of 75 million total, or one-third.

These megabears get a few things right (often after being wrong for years), and suddenly they're all over the media spreading as much FUD as possible. Who knows? They could still be right. But despite recent "good calls," their collective long-term record is still pretty terrible.

[Architect]

I wouldn't call Shilling a megabear, and he's been making lots of money being right for decades. But I wonder why people don't say the same thing about permabulls?

Keynes had a quote about this, unfortunately I don't have it handy. Something to the effect that, to most people, it's better to be conventionally wrong than unconventionally right.

Yes, I know and agree that over the long term things are great and we make lots of money off conventional investing. Over the long term we're also dead (more Keynes).

Quote:

Originally Posted by ziggy29 These megabears get a few things right (often after being wrong for years), and suddenly they're all over the media spreading as much FUD as possible. Who knows? They could still be right. But despite recent "good calls," their collective long-term record is still pretty terrible.

[Martha]

Quote:

Originally Posted by Architect I wouldn't call Shilling a megabear, and he's been making lots of money being right for decades. But I wonder why people don't say the same thing about permabulls?

Simple human nature. We love optimists.

[ziggy29]

Quote:

Originally Posted by Architect I wouldn't call Shilling a megabear, and he's been making lots of money being right for decades. But I wonder why people don't say the same thing about permabulls?

Three things come to mind:

(1) I think a lot of the people who were generally bullish were poo-pooing some of the "Dow 36000" talk as wishful thinking in a reasonable amount of time;

(2) The strong long-term tendency of the market is to go higher, not lower, so it's natural that long term people believe the market will go higher. (It also means that people who are frequently bearish are likely to be wrong more often, even if when they are right it could be spectacularly so.) I'm not talking about Shilling in particular but people who tend to be bearish in general.

(3) The "permabulls" don't tend to have an I-told-you-so attitude toward people who were more bearish when they were right. People who push gloomy forecasts are much more likely, in my experience, to say "I told you so" and taunt those who didn't follow their forecasts. Nobody likes to have salt poured on a wound.

[Ed_The_Gypsy]

Shilling made a comment something to the effect that all stocks [growth, value, income, international, etc.] were the same asset class. I found this interesting. The point being, if the bottom drops out, all equities go down.

All of my equity assets [value, international, income, REITs] have declined roughly the same amount, while the bonds and CDs have held up. Big Duh.

Diversification doesn't mean 6 oil companies after all.

[haha]

Quote:

Originally Posted by Architect I wouldn't call Shilling a megabear, and he's been making lots of money being right for decades. But I wonder why people don't say the same thing about permabulls? Keynes had a quote about this, unfortunately I don't have it handy. Something to the effect that, to most people, it's better to be conventionally wrong than unconventionally right. Yes, I know and agree that over the long term things are great and we make lots of money off conventional investing. Over the long term we're also dead (more Keynes).

Keynes also termed market timing "credit cycle investing". He tried it in the early 30s, and abandoned it because he couldn't make it work for him.

There is a 12 volume biography and collection of Keynes, with many all of his works, much of his correspondence, etc.

I read the volume most concerned with investing AFAIK #8. That is where the above observation is found.

Wonderful writing too- the most subtle sarcasm I have ever seen.

Ha