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‘People Are Really Scared’: Gary Shilling Sees Warning Signs for Economy, Stocks

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What You Need to Know

  • Shilling says consumers are “very cautious,” not a good sign for a consumer-led economy.
  • The housing market is beginning to cool, the economist and advisor says.
  • He says the stock market is vulnerable to a correction, cryptocurrencies to a government clampdown.

Don’t expect a rip-roaring second-half economic surge, says economist and investment advisor Gary Shilling.

“The consumer in this country is very cautious,” he says, noting the 1.3% drop in May retail sales and the growing decline in spending levels of government stimulus checks.

The Federal Reserve Bank of New York reported that consumers on average spent 24.7% of their stimulus checks from this March compared with 25.5% of their January 2021 checks and 29.2% of their checks from last June, choosing instead to save more and in January especially to pay down debt.

“People spent only a fraction of their stimulus checks and there was no follow-through,” said Shilling. “People are really scared.” 

In an economy supported by consumer spending — it accounts for about 70% of GDP — such fears cannot be dismissed, according to Shilling. He’s watching to see if the softness in retail sales continues.

“If we don’t see enough of a pickup in spending on services to offset ongoing weakness in spending on goods that tells you the consumer is retrenching,” he says.

In May, that shift from goods spending to services spending was not enough to prevent retail sales from declining from April levels. 

Housing Cooldown

Another area where Shilling sees strength declining is the housing market, which has been surging. “It’s beginning to cool,” says Shilling. “How cool remains to be seen, but the speculation exceeds any rational limits on the upside.”

The housing buying “frenzy,” as Shilling calls it, has been fueled by an insufficient supply to meet demand due to  shortages of building materials, builders slowing production after the the housing market collapse during the 2008 subprime mortgage crisis and many homeowners choosing to stay put during these uncertain times, which limited existing home sale inventories.

In a recent article published on Bloomberg, Shilling noted an 18% decline in mortgage applications for new purchases year-to-date, tighter mortgage lending qualifications and a decline in home purchase plans of consumers — the biggest monthly drop since 1977, according to the Conference Board.

“The bubble is deflating,” Shilling said. “It’s not like the subprime mortgage collapse but demonstrable.” 

Stock Market Is Vulnerable; Cryptocurrencies Are Ponzi Schemes

Shilling says if economic growth doesn’t live up to expectations, the stock market is vulnerable to a retreat. “You could see a 20% to 30% correction without being way out of line between now and year-end.” The reason, according to Shilling: The market is overvalued and there is still a lot of speculation, including in meme stocks.

A lot of the money created as a result of Federal Reserve stimulus policies has gone into stocks and into “rank speculation” in Bitcoin and in meme stocks such as GameStop. The S&P 500 is up 12% year-to-date.

Asked about Bitcoin and cryptocurrencies in general, Shilling called them “giant ponzi schemes” that “have no legitimate use other than to be used for illegal and off-the board transactions,” as seen in recent ransomware incidents.

He expects  a “real clampdown” on cryptocurrencies by government agencies. “It really hasn’t cracked yet but I sure wouldn’t want to be long Bitcoin now,” says Shilling, adding that he has shorted it in the past and made money.

The Securities and Exchange Commission on Wednesday delayed a decision on the VanEck Bitcoin ETF for the second time, noting it needed more time to review the proposal. Unlike its previous delay of the proposal, it is asking for public comments on whether such a product should be allowed to trade on the public markets. Currently about a dozen Bitcoin ETFs are pending before the commission.

(Pictured: Gary Shilling)