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Gary Shilling Sees `Significant' Stock Selloff Within 12 Months


Myth465
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I dont agree or disagree with this but I do question peoples assumptions.  A couple of examples:

1) Where is the evidence that QE1 didn't work?  There isn't any because it can neither be proven nor disproven.

2) Have stocks really rallied due to the possibility of QE2 or are things slowly improving.  Brings to mind the wall of worry concept.

 

That being said I have no idea what is going to happen next.  The only working indicator is that we are starting year 3 of a presidential cycle and markets have never gone down in year 3.  But history doesn't always repeat itself. 

 

I personally think that QE2 was more of a political move than an actual necessity at this point. 

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I always thought the purpose of QE1 was to save the big financial firms (which it did) and to save the financial system from collapse (so far so good  :-\). The purpose of QE2 is to stimulate economic growth in the economy. Most people think it means flooding the markets with liquidity but my understanding (and I may be wrong) is that the FED creates money to buy longer dated bonds but the net effect overall is liquidity nuteral. This does however keep short-term rates low and the FED by buying 10 year bonds keeps longer term rates lower. The hope is that lower rates will stimulate economic activity by companies and consumers both. This is where it breaks down - over leveraged consumers for the most part are not going to go deeper in debt at this point, they need to deleverage which will do nothing to stimulate growth.  My $0.02 ....

 

cheers

Zorro

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I think forecasts are only useful when you see plenty for exuberance. For instance, he was right about the 2000 stock market and 2006-2007 housing market.

 

I can't say I see this now. In retrospect, maybe things will look different. Over the next 10 years, great companies will also do better than cash or bonds, I'd suspect. Stocks aren't terribly expensive (although, certainly not cheap).

 

Many, many stocks in 2000 were very expensive. No earnings and multi-billionaire market caps were the norm.

 

I was too young to realize much then and I bought.

 

I started searching for a home about 4-5 years ago and couldn't find anything.

 

I was slightly more intelligence this time and decided to wait. I purchased a foreclosed home about this time last year and I should double my money or so (hopefully!)

 

I don't see a lot of exuberance right now. As I said, though, in hindsight, maybe I'll see some things I don't see now.

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This is where it breaks down - over leveraged consumers for the most part are not going to go deeper in debt at this point, they need to deleverage which will do nothing to stimulate growth.

 

That's the point. The private sector has almost twice more debt than during the great depression and we traded rapid deleveraging for a slower one with our interventions (not that it was a bad thing relatively speaking). Steve Keen who predicted the crisis and went public in 2005 to warn does an excellent job at describing/modeling the problem: http://www.debtdeflation.com/blogs/2010/11/15/why-credit-money-fails/.

It will take a long time and the market is discounting full recovery. At some point reality will set in. Moreover the dynamics of deleveraging are treacherous (economic output depends on velocity and acceleration of debt/deleveraging) and difficult to forecast accurately. So I would agree very much with a lot of things Gary says:

- deleveraging here to stay for a long time.

- expectations should be scaled down.

- housing market still very sick.

- dollar not as weak as perceived comparatively speaking. QE2 was not money printing and many understand modern monetary systems wrong.

 

 

 

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I'm not familiar with Gary Shilling, but before the collapse, in around 2007, I really can't remember many people predicting a financial and housing collapse, but now it seems like every day I read a profile of different people credited for predicting the collapse.

 

I guess most of the talking heads say enough completely different crap on a daily/weekly basis so they can always look back and make it look like they predicted everything.

 

 

*edited to fix typos.

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I'm not familiar with Fary Shilling, but before the collapse, in around 2007, I really can't remember many people predicting a financial and housing collapse, but now it seems like every day I read a profile of different people credited for predicting the collapse.

 

I guess a most of the talking heads say enough completely different crap on a daily/weekly basis so they can always look back and make it look like they predicted everything.

 

I've noticed the same thing. I can vouch for Schilling for the stock and housing markets. He published Irrational Exuberance in March of 2000. I also held off buying a home thanks to his housing research.

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I've noticed the same thing. I can vouch for Schilling for the stock and housing markets. He published Irrational Exuberance in March of 2000. I also held off buying a home thanks to his housing research.

 

That was Schiller, not Schilling.

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I've noticed the same thing. I can vouch for Schilling for the stock and housing markets. He published Irrational Exuberance in March of 2000. I also held off buying a home thanks to his housing research.

 

That was Schiller, not Schilling.

 

That was Shiller, not Schiller  ;D

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The analysis of the deleveraging process in itself is interesting.  I was looking at Shilling's comments, Naill Ferguson's, Richard Koo's, and the premise that FFH operates a substantial part of their portfolio on.  If interest rates stay very low for a long, long, time what is the best way to invest? 

 

To my mind keeping cheap debt, that cannot be quickly called, makes the most sense rather than rushing to pay it down - i.e. Mortgages and Heloc.  Buying stocks that raise their dividends regularly and gently leverage their own balance sheets with cheap bonds:  JNJ comes to mind, or FFH for that matter.

 

Another possibility in this environment is banks (those with sound balance sheets).  They get the deposits for insanely cheap in a low interest rate scenario.  Whether they can lend at reasonable rates is another matter.

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If you are a fan of the muddle through delever process. I would look at keeping funds in the market, and expanding via reasonable non callable debt.

 

Once things settle down, I plan to purchase realty for rentals with only 5% down. I will ensure that rents can cover all expenses and will keep cash reserves for an emergency. I believe I heard Prem say in a CFA speech that he sees us deleveraging for quite a while followed by higher inflation, he also said that he has no idea how this will turn out.

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I've noticed the same thing. I can vouch for Schilling for the stock and housing markets. He published Irrational Exuberance in March of 2000. I also held off buying a home thanks to his housing research.

 

That was Schiller, not Schilling.

 

That was Shiller, not Schiller  ;D

 

haha. thanks for the clarification. wow...i feel like an idiot. I have no idea who schilling is either, then!

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