The latest US jobs data has brought the bears out in full force. And Gary Shilling, president of A. Gary & Co, is certainly no exception. Gary thinks the US recovery has primarily been driven by consumer spending as there has been a mini spending spree over the last few months.
Though incomes rose slower than expenses, it looked earlier jobs were picking up and that would provide the economy the boost it required. However, the recent employment data throws cold water on the consumer-spending driven recovery theory. The consumers have now more reasons to save than to spend; they need to build their assets since their equity in homes has fallen and people need to save for retirement. So if consumers retrench, there are not too many things that can hold the US economy up.
In his recent columns for Bloomberg, Gary observed that the operating profit of S&P 500 companies could drop to $80 per share on the back of a hard landing in China and a rising dollar. That would surely mean a double-dip recession since the forward P/E multiple would fall below 10 and the S&P 500 would touch the 800 mark, a massive 43 percent drop from the recent highs.
Gary says foreign earnings of US companies would be hit because of the unfolding recession in Europe. A strong dollar will impact margins because of translational losses; a hard landing of China, coupled with a consumer spending retrenchment in the US, makes the perfect case for a moderate recession.
Gary’s investment prescription: long treasuries, short stocks, short commodities and long the dollar. You can watch the video here.
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