Shilling Shuns Stocks, Sees S&P At 800

Tyler Durden's picture

In an attempt to not steal too much thunder from Gary Shilling's thought-provoking interview with Bloomberg TV, his view of the S&P 500 hitting 800, as operating earnings compress to $80 per share, is founded in more than just a perma-bear's perspective of the real state of the US economy. As he points out "The analysts have been cranking their numbers down. They started off north of 110 then 105. They are now 102. They are moving in my direction." The combination of a hard landing in China, a recession in Europe, and a stronger USD will weigh on earnings and inevitably the US consumer (who's recent spending spree has considerably outpaced income growth) with the end result a moderate recession in the US. The story is "there is nothing else except consumers that can really hype the U.S. economy" and that is supported by employment but last week's employment report throws cold water in that. "Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up." While the argument that the US is the best of a bad lot was summarily dismissed as Shilling prefers the 'best horse in the glue factory' analogy and does not believe investors will flock to US equities - instead preferring US Treasuries noting that "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."





Links to the three-part series that Shilling (and his hosts) describe can be found here (these are notes from the longer discussions):

Part 1 - Shilling Describes the key factors behind his recession call:

Consumers Are the Linchpin: The U.S. economy is being fueled these days by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, after rising 0.4 percent in January. Retail sales rose 1.1 percent in February -- the fastest pace in five months -- while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.


Spending, Saving and Debt: The support that consumer spending has received from less saving and more debt appears temporary. Household debt -- including mortgages, student loans, and auto and credit-card loans -- has fallen relative to disposable personal income, though. In my analysis, this is largely because of write-offs of troubled mortgages. Nevertheless, revolving consumer credit, mostly on credit cards, is no longer being liquidated.


Consumer Retrenchment: The data so far aren’t conclusive, but evidence of U.S. consumer retrenchment is emerging. Consumer confidence has moved up recently but remains far below the levels of early 2007 before the collapse in subprime mortgages set off the Great Recession. Real personal consumption expenditures growth has been volatile in recent months and falling on a year-on-year basis. Voluntary departures from jobs, another measure of confidence, may be decreasing. And consumer spending will no doubt have a big slide if my forecast of another 20 percent drop in house prices pans out.

Housing activity remains depressed, with the only signs of life coming from the multifamily component, which is being driven by the appetite for rental apartments as homeownership declines. Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage-lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many have no desire to buy an asset that continues to fall in price.

What Oil Threat?: Recently, there has been great concern about $4 per gallon gasoline and whether, as in 2008, those high prices will act as a tax on consumer incomes and force drastic cutbacks in other purchases.


Part 2 - Shilling focuses specifically on the employment picture

Job openings were up 16 percent in February compared with a year earlier, but in a survey by the National Federation of Independent Business, a net zero percent of small-business owners said they planned to hire over the next three months. Furthermore, would-be entrepreneurs aren’t all that enthusiastic: Only 2.7 percent of job seekers started new businesses in the last quarter, down from 12 percent in the third quarter of 2009.

Job openings: The U.S. has a lot of job openings, but having endured huge layoffs in recent years, employers are being very picky in new hiring. Contrary to Federal Reserve Board Chairman Ben S. Bernanke’s assertion that high unemployment is mainly a cyclical concern that will be solved by economic growth, I believe that a big part of the problem is structural.


Business Cost-Cutting: During the sluggish business recovery that began in mid-2009, sales-volume increases for U.S. business have been tiny, and the ability to raise prices was very limited even as commodity and other input prices climbed until about a year ago. As a result, profit margins were threatened. Meanwhile, foreign competition has been fierce.


Manufacturing productivity: Labor-intensive factories producing items such as textiles or shoes have long departed American shores for low-cost venues abroad and may never return. Those that remain -- and the type of manufacturing that is coming back to the U.S. in the much ballyhooed “reshoring” -- is robot-intensive, highly automated production that requires limited labor. Manufacturing output has recovered from its recessionary low, though not to the previous peak. Yet output per person, a measure of productivity, after the usual recessionary decline, has resumed its robust upward trend.


Jobs up, profits down: As in the past, the large share of national income accounted for by high corporate profits is unlikely to last for long. In a democracy, neither capital nor labor keeps the upper hand indefinitely. Quite apart from the Obama administration’s determined effort to redistribute income in favor of lower-income households, the seeds of narrower profit margins have already been sown. In recent quarters, productivity growth has been tiny. Have we reached bottom in terms of cost-cutting? Industrial leaders say productivity- enhancing opportunities are never exhausted, but it is possible that the low-hanging fruit has all been picked, at least for now.


Corporate earnings implications: More jobs are about the only spur to household incomes, and consumer spending is the only source of strength in the economy this year. If new employees spend their paychecks freely, they could create more consumer demand, additional corporate revenues and profits, more jobs, and so on, in a self-feeding cycle. But, as I discussed in Part 1, new and old employees are more likely to retrench and precipitate a recession.

That would cause great disappointment for corporate profits. In conjunction with a major recession in Europe, a hard landing in China and foreign-earnings translation losses caused by a rising dollar, the operating earnings of S&P 500 companies could drop to $80 per share this year, compared with Wall Street analysts’ expectations of $104. That would almost guarantee a major bear market with a likely price-earnings ratio low of about 10. This implies that the S&P 500 index (SPX) would be around 800, a 43 percent drop from its recent level.


In Part 3, I’ll examine why the Fed may embark on a third round of quantitative easing if the economy weakens this year and whether Congress will be tempted to enact policies of its own to address a huge fiscal drag in 2013 as payroll and income taxes rise and unemployment benefits plunge.

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mayhem_korner's picture



If there was a real market, this would be a sensible call.

slewie the pi rat's picture

Shilling is one of the smartest guys out there and he gets it.

flacon's picture

This just in from.... CNBC:



Bernanke to Congress: We're Much Closer to Total Destruction Than You Think




BERNANKE: "Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. "

Did Bernanke just divorce John Maynard Keynes? 




slewie the pi rat's picture

Published: Wednesday, 9 Feb 2011


flacon's picture

Sorry, I didn't see that! Thanks for pointing that out to me! I guess Bernanke is still porking Keynes... 

derek_vineyard's picture

fire your entire offense, financial survival now rests on your defense


derek_vineyard's picture

Smart ass punks with hoodies should be reason enough...was his crack showing, too?

wtf needs a hoody in florida?

if the hoody is zipt, you must acquit

Spirit Of Truth's picture

Rehearsal for Sunday military parade? RT : Holy crap - fighter jets just went roaring across Pyongyang!/w7voa DJIA reversal from 13K is potentially an ominous sign. Dow Closes Below 13000 Mark

TruthInSunshine's picture

The Bernanke 'Put' is not only going to save equity markets from yet another death spiral, but will pump them perpetually higher.


Just like it the Greenspan 'Put' did in 1999.

Just like the last Bernanke 'Put' did in 2007.

The bullshit sell-siders (who are playing with OPM, anyways) would never admit that fractional reserve chicanery could never perpetually float a bubble inflated with toxic fumes. That would cut against their business model. Muppets wanted always and forever.

The delusional bulls (who are pitifully playing in the world's most rigged casino with their own money) just can't see the forest through the 'green shoots,' and are impervious to history.



The Big Ching-aso's picture



Shilling appears to be no shill, but could be Amish if he shuns stocks.

Oh regional Indian's picture


is willing

For a small fee

or a billing

To say, or rather shill

As per the Master's Will.



Michael's picture

I want to see a toxicology report on this kid Treyvon. What makes a kid like this with a pack of skittles and an ice tea in his pockets go looking for trouble? Well he found it. The kind that made him dead.

Michael's picture

Imaging the Federal Reserve discount rate will never again go up past ZIRP for the rest of the history of the USA just like Japan?

We got them right where we want them.

That goes for the low yield treasury bond rates as well.

PersonalResponsibility's picture

WTF, it was at night!  And who is not allowed to wear what they want in your book?  

max2205's picture

Gary, meet Ben. I bet on Ben

Jendrzejczyk's picture

Very important points to remember.

TWSceptic's picture

This is easy for him to say, if things go wrong he can point to that and blame government. But he's part of the problem, so fuck Bernanke.

DosZap's picture

"Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. "

Did Bernanke just divorce John Maynard Keynes?  No, he did the USUAL he LIED..................foreigners have already stopped buying to the tune of 60+% of oput degt.

HE is buying the debt,61@% of it.


First part was dead on, second was a fat ass lie.

cranky-old-geezer's picture



"Sustained high rates of government borrowing would continue debasing the dollar, stealing more and more wealth from the American people, pushing them further toward poverty and putting the economy in deeper depression, along with losing its world reserve currency status, whereupon the American economy would implode, and America would collpase for all practical purposes."

Fixed it.

S&P 800?

Forget it.  Bernanke will keep pumping stocks while the dollar keeps losing value (from all the printing needed to keep pumping stocks).

We don't have to worry about declining stocks.   We have to worry about a declining dollar. 

Stock market collapse won't destroy America.   But currency collapse will.

derek_vineyard's picture


usa is pulling a japan circa 1987-present w/ minor variations

chinaguy's picture

agree - the trolls are beginning out number the legitimate posters here-

disrespect Shiller all you want.. but you are  a f-ing idiot if you do so w/o a hundred of hours of research to base your opinion on

SAT 800's picture

Yeah, it's hard to think of anyone who has earned more credit for seeing emperor without his pyjammas on, and publishing it. That Case-Shilling housing report was really all you needed to know about, about the time Bernanke was saying "houses prices will never go down"; or whatever the exact idiocy was he came out with.

durkdiggler's picture

Shilling: Long treasuries, long US Dollar, short stocks, short commodities...


That to me, is not someone getting it, which to me is the problem. Old man, who has made his money over the last 30 years, and can't see or probably even accept things are changing.

non_anon's picture

my sentiment exactly, yet there are those that can trade and make money in a manipulated market, I for one, will not particpate in this corruption. I believe if everyone that wants to return to the rule of law and unfettered markets should not participate in the illusion.

my .000000000002

vast-dom's picture

Correct. And funny enough I've been calling SP at 800 here on the hedge for well over 6 months, and yet....hopium clearly springs eternal....until it doesn't....agree with the call ;)

SAT 800's picture

Dude; we just had a huge stock market rally; that was verrry profitable; you've been soo wrong for so long; why do you want to advertise this? And yes; once again, the tower of jello looks wobbly; and it makes sense to consider the possiblility that it could all faw-down and go boom. Being a stopped clock isn't really all that impressive.

WhiteNight123129's picture

I think that Shilling is right, but that type of event would be extremely extremely deflationary, that would mean a huge amount of printing from the Fed.

Gloomy's picture


jomama's picture

pretty sad that the best you can do is impersonate someone else.  

chinaguy's picture

posting this from my phone...cause most of you newbs need help

ive been tracking shiller for years

the fucker is,if any thing, slow and conservative...

he has been right on RE by 100%

trade to cash on DOW over 13000 & prepare to buy in when the SP breaks 1000..

Buy all the way... The Fed will print again....

Gloomy's picture

P.S.-I lost a bundle following this guys advice about stocks

Cursive's picture


Maybe you should try Tony Robbins.

Gloomy's picture

Naw-I just gave up and bought a bunch of PM's.

Cursive's picture


Well done.  Now, don't forget to be well-armed.

yabyum's picture

And repair the hole in your boat........or not.

Temporalist's picture

Oh my god you're brilliant!  I am going to start advertising on ZH to repair boats and sell waterproof floating safes to the ZHers.  I'd considered selling boating insurance but with the way these people pilot their vessels I'd be bankrupt in one weekend.

slewie the pi rat's picture

Gloom, fixed income is his speciality and he nailed it

dolph9's picture

What the economists never want you to realize, what they never want you to work out for yourself, is that stocks and bonds are actually correlated.

When you have a credit boom, as we've had for the past 30 odd years, bonds go up and yields go down because credit can increase and increase.  And stocks do well, because credit allows business growth and formation.

Stocks and bonds are CORRELATED.

We are now entering a period where both will do poorly.  Real resource contraints, and competition for them, drives up prices for energy and commodities in real terms.  Stocks can't do well in such an environment, inputs are too costly for businesses.  Bonds can't do well...huge intervention is required just to keep them going.

The whole thing will implode, including stocks and bonds.  Stay in cash and metals.

veyron's picture

Bernanke suggested the same thing when someone asked about the effects of ZIRP on savers.