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S&P 500 to plunge 27% and bonds to rally again this year predicts veteran guru Gary Shilling

Posted on 10 February 2013 with 6 comments from readers

Perennial bear and long-standing bond bull Dr. Gary Shilling is sticking his neck out where few other commentators will dare to go at the moment and predicts a 27 per cent fall in the S&P 500 this year.

His latest Insight newsletter concludes: ‘We estimate that S&P 500 operating earnings will be $80 this year and that the P/E will drop to 13 in the global recessionary climate, about the average in past bear markets, and the S&P 500 index would fall to 1,040, a 27% decline from its 1,426 level at the end of 2012. Other major stock markets should show similar weakness, replacing the euphoria of the Grand Disconnect.’

Great Disconnect

The ‘Great Disconnect’ is the contradiction between low or no growth in the global economy and its soaring stock markets. Dr. Shilling demonstrates how financial leverage or borrowing is the cause of this disconnection in his latest newsletter. Public debt has replaced private debt in recent years.

The problem is that this rocket fuel is having less and less impact on financial markets which must eventually return to earth, or shall we say fair valuation. And the flipside of this is a perhaps final leg in the great bond bull market that Dr. Shilling correctly called three decades ago.

So not only is he one of the very few Wall Street commentators to call a crash, he is also not among those looking for a ‘Great Rotation’ from bonds to stocks, quite the reverse! What then will trigger this stock market crash?

Dr. Shilling says: ‘Forecasting specific jolts is hazardous, although we can list several possibilities, including a hard landing in China or an oil price leap, triggered by an Iran-related blow-up in the Middle East, or the failure of a major European bank or a US recession, which would be a major shock to bullish investors, especially since so many believe the American economy is on the mend.’

All of the above?

Or perhaps all of the above! ArabianMoney has recently highlighted severe doubts about the positive data coming out of China. Iran has just specifically rejected talks with the US on nuclear issues, what is the next step? European banks are still vulnerable to sovereign debt shocks. And the possibility of a US recession looms large after the contraction in Q4 last year.

Could the world economy be about to succumb to a series of body blows precipitating a 1974 or 1987-style financial market meltdown?

Dr. Shilling has been very right on bonds and mainly wrong on equities for sometime. But if you call a downturn for long enough it will usually happen, normally when everybody else is very complacent, like now.

Posted on 10 February 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Hedge Funds, Investment Gurus, Sovereign Wealth Funds, US Dollar

6 Comments posted by readers:

Comment by Andy - 10 February 2013

There are insiders selling though…

Comment by John Mark - 10 February 2013

One specific jolt may occur after Obama visits Israel in March.

It is hard to believe that the President is making his first visit to Israel in order to tell Netanyahu not to attack Iran. He could do this from Washington or through an envoy.

More likely to my mind is that he wishes to discuss a surgical strike on Iran, which is now predicted to produce nuclear weapons by June-August this year, according to Israeli military intelligence.

Even his visit may spook the markets. A US-Israeli first strike would plunge the world into the terror of an oil blockade in the straits of Humoz, regardless of whether Iran succeeds in blocking the passage of oil tankers or not.

So, that’s the jolt which I think will crash the markets.

Comment by TomTheMon - 11 February 2013

stocks vest, now is not the time to hold them.
they vest and are sold the same day, or at least that is what i do.
don’t believe the all is well hype.
many areas of technology, now a bellweather, are in a deflationary environment with selling price pressure and/or demand (reduced) pressure.

may will be interesting this year.

Comment by Andy - 12 February 2013

The week that Obama is abroad you will see market gains. When ever the President is abroad the market in the US gains. Usually the President wanting to sell US Treasuries and Bonds abroad. They always want to reassure foreign countries that buy that US Bonds and Treasuries along with US markets being safe and stable so they usually do quite a bit of buying themselves during that week that the President is abroad. Wait and see.

Comment by John Mark - 12 February 2013

So, I’m wrong about the President going to Israel to work out a joint strategy to attack Iran.

Although this is still a possibility, for we never really know what is said behind closed doors, the pundits are telling us that he will tell Netanyahu not to attack Iran.

But why is Obama going now? Because Netanyahu has said Israel will attack sometime between the spring and summer of this year.

So the President goes now in order to show the whole world that he had nothing to do with Israel’s attack on Iran this year. “Why”, the man can claim, “I went all the way to Israel to tell them not to attack Iran and yet, what do they do: they attack Iran! What more could I have done?”

The President’s visit, at short notice following the Israeli election, is not to stop Israel attacking Iran in the next few months, but to exonerate the US from that inevitable attack. The likelihood of Israel attacking Iran is increased by virtue of Obama feeling that he must make his first visit to Israel NOW.

The specific jolt to the stock markets, therefore, remains very much alive, even though we are now told that the President is not going to join in with such action.

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