Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending
Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:
He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:
1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.
A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:
The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.
“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.
“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”
Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.
Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”
Dr. Shilling told Newsmax:
Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….
I look for the biggest decline in consumer spending since the 1930s.
Next up? Phase four, where recession spreads throughout the world.
Oh joy…
Sources:
“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008
“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008
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