A Dark (Economic) Year Lies Ahead

Gary Shilling’s column in the current Forbes makes me want to lie down for a good long rest — like until 2007 or so:

This year I’ve got ten investment themes that I’ll flesh
out in future columns. Eight should unfold in this calendar year; the last two may not start until after 2006. First and foremost, the current housing weakness will develop into a full-scale rout. As spelled out in my Oct. 3 column, it’s clearly a bubble and is nationwide. Median home prices need to fall 29% to return to their normal relationship with rents and 35% to relink with the Consumer Price Index. The 20% decline I predict may be exceeded.


  1. Ay brother.
    Paul, Shilling is a deflationary bond-promoting dude who has been bearish on stocks for 25 years. Here’s an excerpt that sums it up:
    “Ninth, the global deflation I’ve been forecasting might commence this year.” Great… Mr. Broken Clock.
    Second, maybe you should host a online “Bubble Debate”. You write about it a lot, and it must seem more relevant to you down in San Diego with respect to real estate.
    I’d argue, as I have in your comments that real bubbles aren’t feared so strongly in advance and that local markets going thru corrections of 20% every 5 years aren’t really bubbles… they are called “Markets” instead.
    So get up, stretch out, go surfing or go play golf…

  2. In real bubbles, prices decline 90% or more, often to zero. The housing market may be over-priced, but it’s not a bubble. Look at tech-stock prices in the late 90’s, now that was a bubble!

  3. Franklin Stubbs says:

    The problem is that the economy is so heavily leveraged to housing via consumer spending, mortgage equity withdrawal, credit default swaps and mortgage backed securities that even a 10% drop in overall home prices could cause all hell to break loose. Imagine the knock-on effect of IO mortgage holders, now upside down, leaving the keys to their house in the mailbox, as a much larger portion of HELOC dependent consumers see their payments balloon and their discretionary income shrink to nil.
    It’s all about the leverage baby — live by the sword, die by the sword.

  4. [One practice is the “broken clock” strategy, which consists of always forecasting the same event. An example in the sample is A. Gary Shilling, a well-known recession-caller. Throughout the 1980s, Shilling continually predicted recession. In 15 out of 18 Wall Street Journal surveys in which he participated 1981–1992, his year-ahead long-bond yield projection was the lowest among all forecasters … 8 out of 10 times his forecast is below consensus, and he is often the extreme pessimistic outlier (when he is optimistic in his forecast for 1972, he is also the extreme optimistic outlier). Keane and Runkle cite Zarnowitz’s (1969) finding that in a survey including non-professional forecasters, “a number of the occasional forecasters submitted extreme and rather unreasonable predictions” as an example of “inaccuracies due to lack of proper economic incentives” of the forecaster. Yet it is hard to describe Shilling’s forecasts as anything, but “extreme and rather unreasonable”.] source: http://www.som.yale.edu/faculty/oal4/research/fcast.pdf