Prescient forecaster says S&P to 600 by end of year; deflation; buy dollar

[Beet]

Gary Shilling: Stock Market Will Crash As US Consumers Retrench

Most U.S. consumers believe the economy is not getting any worse, according to a recent poll conducted for Reuters, but that does not mean they're ready to spend like the good ol' days.  Of 1,001 consumers surveyed by America's Research Group, 40.1% said the economy was getting better, and 33.8% said the economy was the same.

That's exactly why economist Gary Shilling isn't expecting a recovery anytime soon.  Shilling, who correctly predicted the recession well ahead of other experts, says, "with this consumer retrenchment, we'll probably see the recession last until first half of next year."

And when the economy does turn, don't expect a robust return to growth, he says.

His reasoning:

The housing market usually returns to strength, but Shilling says that won't happen this time. That's because the inventories are still too large, and as he puts it, "they are the mortal enemy of prices."
Consumers have learned their lesson. "We've never seen consumer spending retrench like this."
In fact, the rebound will be so sluggish it might escape notice. "You won’t even know there is a recovery, and unemployment will be increasing," he claims.

All this spells bad news for the stock market. Shilling predicts weak earnings will drag the market down to new lows. He predicts, the S&P 500 will bottom at about 600 late this year, though he’s not calling for a crash. Instead, he says with a smile, "it may be Chinese water torture." He must be short.