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Shilling: Economy, Market Have Room to Fall



October 28, 2008 – Comments (4)

Economist Gary Shilling says both the economy and stock market have more room on the downside.

“Don't be misled by the global stock market rally that flared up after governments in Europe and then the U.S. announced their direct purchases of bank shares,” he wrote in a column for

“Instead, consider the Bronx cheer that greeted the $700 billion bailout law. That market meltdown was caused by shareholders finally anticipating economic pain.”

Households and banks have just started unwinding the huge leverage they amassed over three decades. That deleveraging represents the cause of economic and stock-market weakness, Shilling says.

It’s occurring in four phases. First came the collapse in the housing market that began last year, Shilling writes.

“Phase two, Wall Street's woes, began in mid-2007, when the demise of two Bear Stearns hedge funds revealed that financial firms were hugely leveraged and invested in overpriced assets of unknown value.”

Shrinking consumer spending represents phase three. “The nosedive in consumer spending will probably be the deepest since the 1930s,” Shilling said.

Then comes the worldwide spread of economic woe. “The recession will probably be the deepest since the 1930s, especially as it spreads globally in its fourth phase,” Shilling says.

Economist Nouriel Roubini shares Shilling’s glum perspective.

He told The Times of London that the world economy is “at a breaking point” and that stock markets are “essentially in free fall.”

© 2008 Newsmax. All rights reserved.

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4 Comments – Post Your Own

#1) On October 28, 2008 at 1:21 PM, russiangambit (28.86) wrote:

Yes, there is a lot of talk lately of S&P500 going all the way to 600. All those technicians, what do they know -)) ?

However, it is american consumer we are talking about here. I don't know what you need to do to stop an american with some money in the pocket from shopping. 5 year recession might be enough to scare them. Until then, I will not subscribe to an Armgeddon scenario. Right now, I see 1 year recession to work through excesses, get some savings back and then recovery.

Remember, just 2 months ago everybody was going to go green and energy independent. All forgotten now. It takes years of pain or something really scary for people's behavior to change permanently.

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#2) On October 28, 2008 at 2:07 PM, TDRH (96.58) wrote:

russiangambit,   It seems like everything seems to move a lot faster in either direction than I am accustomed to.     Imagine it is the effect of leveraging.     It is all forgotten now, but the SUV's still are not selling. 


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#3) On October 28, 2008 at 2:43 PM, leohaas (29.47) wrote:

"However, it is american consumer we are talking about here. I don't know what you need to do to stop an american with some money in the pocket from shopping."

Deflation will do the trick. Once consumers figure out that the same amount of dollars will buy more next month than it buys this month, they will slow down their consumption! And since consumption is about two-third of our GDP, this consumption slow down will lead to recession. I think that is good because we have to stop consuming more than we are producing!

"Imagine it is the effect of leveraging."

Actually, it is deleveraging that is responsible! That is also a good thing. Who ever came up with the idea that 30 to 1 would be sustainable? The last couple of months have shown us what that can do...

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#4) On October 28, 2008 at 6:45 PM, lquadland10 (< 20) wrote:

russiangambit  On hunting trip AIG exec laugh about how recession will last well into 2011. From a bottom of the rung worker. I was lucky I didn't loose my job. On the other hand that 25 cent pay raise is not going to do much for my bottom line. The tax brake on gas on paying $2.00 less a gal. is going straight into the savings account for simple things like a dinner out at Taco Bell. Car repairs. Taxes on the house and what not. FYI 3 month's ago teen girls come into the book store and buy $40.00 dollars worth of magazines per month. Last month they came in and bought 1 for 3.99. They talked about how they had to save now and they wish they could buy more but the schools and parents and churches were all talking about living below their means. They did not like it but as they said they had to become responciable. This month they came in and bought a book for a birthday present for their friend on saving and investing. I asked them if they were going to get a magazine and they gave me a crossed eyed look and said they added up all they spent on stuff last year and it was about 5,000.00 dollars. Then they proudly told me that if they had saved that amount in a Roth IRA  from their part time job that they could be a millionaire by the time they retire. Well you can see what I was thinking millions of people are doing this around the country and if they don't spend then well more contractions to come. P.S. Even the busboy at my favorite hole in the wall cafe in now out of debt and has managed to save 300.00 dollars in 6 mos. That is darn hard to do on min. wage. It is catching on.

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