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Paul B. Farrell
Nov. 16, 2010, 12:01 a.m. EST
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By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) "” Warning, the American economy faces a huge shortfall in the 2011-2020 decade. The economy needs real GDP growth of at least 3.3% just to keep unemployment stable. But that's impossible.
America will be lucky to get 2% growth, says Gary Shilling, one of the world's leading economic forecasters, in his new book, "The Age of Deleveraging." Shilling calls it a "slow-growth" decade. But in fact, it sounds more like America's facing 10 years of no growth or, more accurately, less-than-zero growth and high-stress chronic unemployment.
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But let's go along with the slow-growth euphemism because this book is a perfect fit with all the other recent warnings: Gross's "New Normal" "¦ Grantham's "Seven Lean Years"" "¦ Morici's " American Capitalism is Broken." "¦ Ariely's "Predictably Irrational." "¦ Ferguson's "Collapse of the American Empire." "¦ Diamond's "Two Bankrupt Political Parties Bankrupting America." "¦ Stockman's "How My GOP Destroyed the U.S. Economy." "¦ Taleb on Bernanke as Obama's "Black Swan." "¦ Plus The Pentagon's big warning that by 2020 "Warfare Will Define Human Life."
All these ignored warnings are now converging in a critical mass that will soon blow a huge hole in our nation's denial of a financial and economic collapse dead ahead.
Why such a huge GDP shortfall? Shilling's first five reasons that guarantee slow-growth for the next decade, include: American consumer retrenchment "¦ Bank deleveraging is reversing trends that financed much global growth in recent years "¦ More government regulation and involvement in economies will "stifle innovation and reduce efficiency" "¦ Developed nations will shift to fiscal restraint "¦ Lower commodity prices will limit spending in resource-rich countries.
America's 25-year "borrow-and-binge" trend is downshifting. A savings spree will spread across the globe. Remember: The savings rate dropped from 10% in 1980 to less than zero in the Bush years. Now watch it shoot back up in the next decade.
Shilling details four more reasons slow growth is guaranteed in the next decade: "Rising protectionism will slow, even eliminate growth." "¦ Continued housing market weakness due to "excess inventory and loss of investment appeal.""¦ Deflation sets lower consumer expectations "¦ Finally, "state and local government will contract," cut spending.
All nine factors add up to a slow-growth 2% GDP and chronic unemployment.
Shilling admits he's not a stock-picker. But while his forecasts are usually contrarian and in the minority among economists, he's usually right, with an uncanny track record after a couple decades with his Forbes column. In his March 2006 Insight newsletter he wrote: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house-price collapse will induce a painful recession that will send U.S. stocks into a tailspin."
And in the new book Shilling adds that back in mid-2006 he "was so convinced the housing bubble would collapse that I searched for ways to make serious money if my forecast proved correct. Short-selling home-builder stock, credit rating agencies, mortgage insurers, Fannie and Freddie, bank and non-bank mortgage lenders, building suppliers, home improvement retailers," real estate related REITs and ETFs.
Then in July 2006 Gary "got a call out of the blue" from "the head trader at Paulson & Co." He didn't know the firm. Today everyone knows they're the firm that was working with Goldman Sachs, shorting their own subprime deals.
If you've read Michael Lewis's "The Big Short: Inside the Doomsday Machine," Shilling's story about how his newsletter's forecasts drew him into the Goldman Machine's orbit is one of many great reasons for adding this book to your library.
But the 22 best reasons are the 12 "sells" and 10 "buys" Shilling forecasts for investors in the dangerous decade ahead. Here's a summary:
Sell banks and similar financial institutions. Regulations uncertainty. Taxes. Gridlock. Huge impact on capital. Vulnerable: Fannie, Freddie, regionals, community banks. In next four years bank portfolios have $800 billion more mortgages coming due, majority underwater.
Sell credit-card and other consumer lenders. These guys act like the 25-year borrow-and-binge mentality is still hot, raising fees, gouging customers. Won't work. More declines in credit cards. Consumers cutting back on "borrow-to-binge" mindset. Forced to save more.
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The Millionaire Code," "The Winning Portfolio," "The Lazy Person's Guide to Investing." Farrell was an investment banker with Morgan Stanley; executive vice president of the Financial News Network; executive vice president of Mercury Entertainment Corp; and associate editor of the Los Angeles Herald Examiner. He has a Juris Doctor and a Doctorate in Psychology.
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