Gary Shillings (author of Deflation) prediction for 2009

Gary Shilling, president of A. Gary Shilling & Co, and his prediction for 2009.

Please note that he wrote a book called Deflation, in 2001. He's been crying wolf for quite awhile but his prediction eventually came true. In the attached videos, he predicts S&P 500 at 600 ($40 in EPS for the combined companies and a 15 multiple). I think he might be too pessimistic .....My bearish scenario is 650 to 700 on the S&P500.



In this follow up video he says that China's middle class isn't large enough to absorb the decline in exports and, as a result, there might be social upheaval in China. I've already seen people flipping cars near police stations in China so I don't find this to be a big surprise.



A noted and notable bear, Shilling predicts the following will occur unless drastic action is taken:

Average U.S. home prices will fall another 20% from current levels, bringing the peak-to-trough decline to 37%. If prices ultimately do fall 37%, 25 million Americans — or about 50% of all U.S. homeowners with a mortgage — will be underwater, meaning their house will be worth less than their mortgage.
Millions of Americans won't be able to make mortgage payments, even if they're able to refi at today's low rates.

Shilling also indicates that there is too much supply vs. demand of homes. As a result, he proposes giving more H-1B visas to attract more highly skilled immigrants, who can then purchase homes, to absorb some of the inventory. My question is "Do H-1B visa people, who don't really have any sense of permanence here in the U.S., purchase homes?" I think I am qualified to ask this question as I gained my U.S. citizenship in July this year (long time procrastinator). On another note, my father worked 30 years + as a Sr. Exec for a major telecom equipment companies and was a HUGE user/supporter of H-1B visas over his years when they needed people with the right skillsets.



Dan Ross

China Cuts Rates by 1% - Most in 10 years!

So the Chinese are stimulating their economy by spending nearly $600 billion by the government (announced last week and posted here on the blog).
http://betterbizbooks.blogspot.com/2008/11/chinese-economy-slowing-down-quickly.html


Now they are trying to stimulate their local economy by encouraging more lending. People will be paid less to save so they will need to invest their $$$ (both banks and individuals). As I have pointed out, China's economy is 50% export based so their economy gets beaten up pretty good when Americans stop buying stuff due to the credit crunch and concerns about their economy. Will it spark increased spending amongst the Chinese consumers? Time will tell....I am not holding my breath though :)



Dan Ross
http://www.betterbizbooks.com/

Ever hear of a "Minsky Moment" - Here is what it is...

Source: http://en.wikipedia.org/wiki/Minsky_moment

A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing prices and a sharp decline in market liquidity. Anyone thinking subprime mortgages/CDOs/ABS as well? (collateral debt obligations and asset backed securities = CDO & ABS). The Minsky moment comes after a long period of prosperity and increasing values of investments, which has encouraged increasing amounts of speculation using borrowed money.

A Minsky moment is a phenomenon named after economist Hyman Minsky, which describes what happens when an economy simply can't afford its debt anymore.

To put this into current, economic terms:
Lower home and stock prices leads to less consumer spending.
Less consumer spending leads to smaller trade deficits.
Smaller trade deficits lead to less foreign capital inflows.
Less foreign capital inflows lead to higher interest rates. Japan didn't need foreign capital in the 1990s.
Higher interest rates cause property and stock values to plunge.
Plunging values leads to less consumer spending.
Less consumer spending ... haven't we been here before?
Repeat cycle until broke.

Dan Ross
http://www.BetterBizBooks.com

Unemployment zoomed past 10 million....6.5%

http://biz.yahoo.com/ap/081108/financial_meltdown.html

The unemployment rate soared to a 14-year high of 6.5 percent, the government said Friday, up from 6.1 percent just a month earlier. The nation's jobless ranks zoomed past 10 million last month, the most in a quarter-century, as piles of pink slips shut factory gates and office doors to 240,000 more Americans with the holidays nearing. Politicians and economists agreed on a painful bottom line: It's only going to get worse.

With the three U.S. auto companies seeking financial assistance to avoid bankruptcy (at least GM & Chrysler) my thoughts of 9% + unemployment are becoming more probable. My thoughts were that this recession would be notably worse than the prior one and, if one auto company fails, it would get us to 9% unemployment very quickly as the ripple effects would go through the economy over a few months.

Banks have exposure, which they would then have to book losses

Auto suppliers would go belly up as many aren't just SOLELY GM, Chrysler or Ford dependent. They lose 35% of their production and potential receivables (uncollected bills) then they' ll have to cut their production, let people go, etc.

Oh yeah, and the communities are dependent on them. So that would ripple through the local economies where the manufacturer is located.....

It could get UGLY quickly is my point here.



FYI, I think the guy with Task is DEAD WRONG for one reason. This economic cycle and downturn is being caused by something NOT SEEN IN 80 years! This is a CREDIT CRUNCH / devaluation cycle and it will take quite a bit of time to work through the system. It can happen quickly or slowly. That is the choice of politicians and policy makers. Either way, I think it will be painful.



Dan Ross
http://www.betterbizideas.com/

Most Affluent City in America ....Plano ???

http://www.usatoday.com/news/nation/census/2008-08-26-income-side_N.htm?se=yahoorefer

Thought everyone might find this article interesting. I don't find it surprising that it would be in the top 20, even the top 10 in America but the MOST affluent city? Come on now!

What I don't understand is how the number increased by 10% for an ENTIRE CITY in one year. That number just smells wrong.

For the record, I work in Plano but live to the north in poor Frisco I guess :)

Dan
http://www.BetterBizIdeas.com

Gas Prices hit new highs - Impact to the Economy??

Evidence shows time and time again that when oil/gas prices hit new highs the economy hits the brakes in a hurry as it reduces disposable income by $20-$40 a week for each American household.

Crude oil now trades at over $112 per barrel and, as the below illustration shows, the cost of one gallon of gasoline has just surpassed the inflation-adjusted peak of 1981. They say this is due to increased global demand, geopolitical tensions, and a declining US dollar. I would say it is primarily due to #1 & #3 with speculation in there as well. If we were to show a concerted effort towards balancing the U.S. Budgets the $$$$ would appreciate and commodity prices would come down quickly

Source: http://Chartoftheday.com <---Check out the free service. Great info. to empower yourself!

Dan Ross

http://BetterBizBooks.com

Consumer Confidence Hits 15 year low?!

From moodys.com today.....
http://moodys.com

The Conference Board index of consumer confidence dipped modestly again in April, in line with expectations. The index came in at 62.3, down from April’s upwardly revised 65.9 (previously 64.5).

This was the fourth consecutive decline in the index and left it at its second lowest level since October 1993. Assessments of labor market conditions fell again. The share of consumers finding jobs plentiful fell 2.6 percentage points to 16.6%, the lowest reading since September 2004.

Consumers are also becoming increasingly concerned about the outlook for their incomes, which does not bode well for spending. Buying plans for homes fell further, matching their lowest level since December 1982. Debt burdens are high and saving is low, and cash flow is becoming hindered by the increased difficulty in obtaining credit and declining home equity. There also is the burden from energy prices, as oil continues to track near $120 and gasoline prices appear headed toward $4.00 per gallon.

Consumer expectations for inflation soared to the second highest level on record back to 1987.

There is a long list of drags on confidence, including soaring energy prices, weakness and volatility in equity markets, weakening housing markets and stretched household finances. On top of this, the labor market is deteriorating.



Dan Ross
http://BetterBizBooks.com

Bear Stearns gone for $2 per share + backing of U.S. Gov't for Chase....

Wow....

Talk about unravelling quickly....World markets crash despite the Fed cutting an additional 25 bps.

Bear Stearns had more exposure than anyone else related to mortgage industry amongst investment banks according to industry insiders so now the leading MBS, investment bank has gone under, a major Private Equity company has been stung (Carlyle Group), there have been approximately $200 billion in write-downs & everyone is yanking credit left and right. \

This is a recipe for stagflation like no tomorrow.

For those that don't know what that is, stagflation "is a macroeconomics term used to describe a period of inflation combined with stagnation (that is, slow economic growth and rising unemployment, possibly including recession).[1] "

http://en.wikipedia.org/wiki/Stagflation

http://economics.about.com/od/useconomichistory/a/stagflation.htm

Dan Ross
BetterBizBooks.com