"I think we've got a second leg down and that's very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it's going to take to recover," Gary Shilling, the president of A. Gary Shilling & Co., told CNBC's Elizabeth Schulze in an interview on Monday, referring to the possibility the stock market will tumble once investors realize the shape of the recovery is an "L" rather than the overhyped "V."
At the moment, President Trump, completely ignoring the millions of jobs that have been eliminated from the economy because it would make him look bad ahead of the elections - is touting "NASDAQ HITS ALL TIME HIGH!" on Twitter on Monday morning.
The optimism of a V-shaped recovery in the back half of the year, coupled with unprecedented central bank liquidity, is fueling the biggest stock market bubble in history, that Shilling says stocks could plunge 30-40% over the next year as investors figure out the shape of the recovery is an "L."
Shilling said today's stock market bounce from March lows resembles the initial dip then rebound in 1929 - and we all know what happened next...
He warned history could repeat as people, even back in the Great Depression, initially underestimate the depths of the downturn and how long a recovery phase would take.
"Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy," he said.
Adding that, "I think we're going to see downward pressure on prices and that works to the advantage of Treasury bonds, which have been my favorite since 1981."
We noted on Sunday that recovery times continue to push out, now 2022, due to surging virus cases forcing states to pause or even reverse reopening plans. The latest data shows retail foot traffic stalled in late June - suggesting the V-shaped recovery narrative is more hype than truth, and jobs and economic growth will not revert to 2019 levels for several years.
There are emerging trends readers should know: the first, as states pause/reverse reopenings, those who were recently hired are now getting fired; the second is permanent job loss - as we noted over the weekend, nearly 3 million jobs have been eliminated from the economy since the pandemic began. Remember, permanent job loss is a consumption killer, considering consumer spending drives two-thirds of the economy.
To sum up, Wall Street's bet is that the Federal Reserve can print its way out of a depression is unlikely as the recovery shape is set to transform from a "V" to "L."