8/1/2011 4:32 PM ET|
5 buys, 5 sells for no-growth decade
Commentary: The United States slips into recession in 2012, and things don't get better from there. Here's how investors can protect themselves.
A slow-growth decade is already raging. You feel it everywhere. And it's going to get worse. A recession is virtually certain for 2012, an angry, volatile, presidential-election year. It may morph into a 1930s-style depression.
That's the clear message we get from Gary Shilling, one of the world's foremost economic forecasters, Forbes columnist and the author of "The Age of Deleveraging."
The American economy is facing a huge shortfall in the 2011-2020 decade. We need real gross domestic product growth of at least 3.3% just to keep unemployment stable. But that's impossible, says Shilling; America will be lucky to get an average 2% real growth.
The United States faces the possibility of 10 years of slow, even less than zero growth. Plus high-stress, chronic unemployment. Plus accelerating global unrest, regional conflicts, increasing Pentagon budgets.
In his latest newsletter, Shilling sets out scenarios for 2012 and the years ahead that feel more like a summer blockbuster that's come alive with a vengeance.
Yes, a 2012 recession is coming, says Shilling, because "much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S. consumers, remain to be worked off."
As a result of the blunders by our fiscal and monetary leaders, the "private and public deleveraging will take years to complete and keep economic growth subdued," says Shilling. "Recessions will be deeper and more frequent."
So which trigger will plunge America into a recession and take down the global economy? "A further 20% drop in house prices because of the depressing effect of 2 million to 2.5 million excess inventories" is setting up a crisis, Shilling says.
Remember how Wall Street's greed grew for several years, then triggered the 2008 meltdown? That disaster hasn't ended. Why? Because another 20% drop in housing "would push underwater mortgages from 23% to 40% of the total, seriously depressing consumer spending and wreaking havoc among mortgages and related securities," Shilling says.
10 reasons for a slow-growth decade
We are in a virtual minefield of triggers merging into a perfect storm. Another big "spike in energy prices due to Middle East trouble could also drive a weak U.S. economy into recession," Shilling says, and "force a Washington response in the 2012 election year."
While Fed Chairman Ben Bernanke has ruled out QE3, more fiscal stimulus is likely, since even Tea Party folks like to get re-elected.
Shilling offers nine reasons investors had better prepare for an era of slow global growth extending from next year's election to 2020. We rounded out his list by adding a 10th reason.
- Consumers are shifting from a 25-year borrowing-and-spending binge to a saving spree. This trend will spread across the globe. Why? Because American consumers will import less from developed and emerging nations that are dependent on exports for economic growth.
- Financial deleveraging is already reversing economic trends that financed much of the world's growth in recent years.
- Developed countries in Europe and elsewhere are moving toward fiscal restraint.
- Throughout the world, increased government regulations and involvement in economies will reduce innovation and increase economic inefficiencies.
- Nationalism and protectionism will slow, or possibly eliminate, economic growth throughout the world.
- Declining commodity prices will erode consumer spending in commodity-producing nations.
- Excessive housing inventory and reduced interest from investors will continue to suppress an already weak U.S. residential real-estate market.
- Deflation will suppress spending as buyers wait for lower prices and negotiate harder.
- State and local governments across the United States are losing revenues and cutting services.
- But perhaps most of all, and certainly affecting everything, the extreme, accelerating irrationality that's driving our angry political wars will undermine an already stagnant economy, until a 1930s-style depression takes down the American economy.
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"Declining commodity prices will erode consumer spending in commodity-producing nations." - Gary ShillingSo it's better that commodities continue to rise beyond the sky's limit so mainly countries in the Middle East can benefit while the American Middle Class joins rank with the poor? I doubt you will find many Americans to have a concerned regard for commodity-producing nations such as, Saudi Arabia, Iraq, Iran, and Libya.
To Sunny Outlook,
You are right about the emerging Middle Class in China and India. Unfortunately that growth of the emerging Middle Clase in these countries cane at a steep loss of American jobs as American Companies moved their manufacturing and technology operations to China and India respectively. I, for one, got my US Engineering job outsourced to India a number of years ago, and I do feel very bitter about the experience.
In the case of India, things are not too rosy either. Although India has a 9.2 percent growth rate (far higher than the USA), there is a big problem regarding wage inflation in the country right now. As more American companies move to places like Bangalore, India (the Silicon Valley of India), and sop up what remaining technology/engineering talent there is left, these American companies are starting to pay considerably higher wage costs comparted to even two years ago. Two years ago, you could possibly get a very good engineer for about $ 12,000.00 a year, now today, you have to double that outlay. .
I have an Indian friend of mine who lives in Bangalore, and he bought a house for about US Dollars 20,000.00 ten years ago, but now in Bangalore you cannot touch the same house for less than $ 80,000.00. If you were in the business of real estate investing, that would be the place to go and NOT the United States. The remaining Indians living in Bangalore that are left behind who are not hired by the American multinationals are really being squeezed to death by inflation.
Hopefully, the pendulum will swing the other way, and American Companies will start hiring Americans again in the United States at good Middle Class wages, and not sit on the cash that they have.. By getting the Debt deal done, both Obama and the Republicans have hopefully given American companies the cue to do something about unemployment, and now the ball is in the court of Private Enterprise.
You know, I read this article and hundreds of others like it, knowing that much of the money movers in the world are also reading them, and I keep thinking of 3 very relevant words...
SELF FULFILLING PROPHECY
I took economics in college so I'm aware that there are a lot of other factors involved, but I'm also in marketing and I know that this kind of doom and gloom cr&p doesn't help either.
Way to go media!
Shiller is wrong on housing. The Bubble has returned to the original pricing it started from (which is 101 in Bubbles, 1929, Nasdaq 2000, Housing 2005-2011).
He's not wrong that it's going to drag out for years. But he is wrong on international, you have 6 billion other people (aside from US and Europe) that have savings and haven't had a credit expansion or become consumers. Even though countries like India and China are doing a poor job of this (i.e. 80% of the population is not really participating in much of the wealth gains) 20% are. And 20% of 6 billion is 1.2 billion million new global consumers. About the same or more than the Industrial populations.
Your precious Dollars & US Treasuries are in a bubble, not commodities. Looks like you're also another mainstream type still beating the deflation drum. If that's the case, why do I keep spending more and more of my dollars for everyday items?
I agreed everything Paul says, getting real with reality it is a good advice even though I think keeping your own home is long term investment that you benefit to live in. As far as US bond goes, where the money is going to come if the government is broke! My advice keep is re-evaluate how much you invest in it and keep your cash closer, the rest of the money that you don't need invest rental property in your own town as more people need housing very soon. Other than that stop paying companies that manufacture their good outside US. If they took the job from us, why shop from their little so called discount saving deals? Let Chinese consumers shop from them. Be supportive the company that keep American jobs here, they are the real heroes. Out source is what kills America and we have to do something about it to keep America back to Industrial revolution. Without production at home we don’t see how we are going to come out this economical disaster. One more last note is for God sake let us end this mad war and bring our young men and women back to their loving family and that is a 100 billion saving plus thousand of human lives.
Uh no thanks, I think I can ride out a 20% decline w/o any problems...plus save on property taxes along the way.
As resource depletion begins to slap capitalism (and the world) in the face, the markets will turn down sharply, followed by years of convulsions, followed by adjustments and recoveries.
There's a new economy taking shape and the free market cheerleaders are the dinosaurs and the ones left behind whistling in the dark by themselves.
See energybulletin for the truth the rest of the morons on MSNBC Money aren't telling you.
Also, buy and read the book The End of Growth, by Richard Heinberg
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