Economist Gary Shilling says both the economy and stock market have more room on the downside.
“Don't be misled by the global stock market rally that flared up after governments in Europe and then the U.S. announced their direct purchases of bank shares,” he wrote in a column for Forbes.com.
“Instead, consider the Bronx cheer that greeted the $700 billion bailout law. That market meltdown was caused by shareholders finally anticipating economic pain.”
Households and banks have just started unwinding the huge leverage they amassed over three decades. That deleveraging represents the cause of economic and stock-market weakness, Shilling says.
It’s occurring in four phases. First came the collapse in the housing market that began last year, Shilling writes.
“Phase two, Wall Street's woes, began in mid-2007, when the demise of two Bear Stearns hedge funds revealed that financial firms were hugely leveraged and invested in overpriced assets of unknown value.”
Shrinking consumer spending represents phase three. “The nosedive in consumer spending will probably be the deepest since the 1930s,” Shilling said.
Then comes the worldwide spread of economic woe. “The recession will probably be the deepest since the 1930s, especially as it spreads globally in its fourth phase,” Shilling says.
Economist Nouriel Roubini shares Shilling’s glum perspective.
He told The Times of London that the world economy is “at a breaking point” and that stock markets are “essentially in free fall.”
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