A Super Bear

A bear market means stock prices are falling (typically 15% or more). Whereas a bull market means stock prices are rising. You can use these terms as adjectives or nouns. If he's bullish, it means he thinks stocks will rise.

The bear came first. This term comes from an English proverb: "It's not wise to sell the bear's skin before one has caught the bear." So, bear was used for selling. Bull was used as a contrast to bear from 1720.

You may not have heard of him, but Dr. Gary Shilling is an economic forecaster and is widely considered to be one of the best in the world.

Shilling is like Nostradamus for investors.

"In 1973, he stood almost alone in forecasting that the world was entering a massive inventory-building spree to be followed by the first major worldwide recession since the 1930s."

"During the 1980s, Mr. Shilling... saw sharply lower interest rates ahead. ...investors who bet on his rate forecasts by putting their money in long-term bonds did very well."

"The July 5, 1991 edition of The Wall Street Journal stated, 'Mr. Shilling was one of the few analysts a year ago to forecast a recession. At that time, he said a recession ‘may already have started,’ a forecast that now looks prophetic.'"

In 2004, he predicted the subprime crisis would occur in the U.S.

In December 2007, he told investors to sell Chinese stocks. The Shanghai Index has fallen 37% since then.

What does he think today?

1. China will plunge. (Sell your China stocks.)

2. Sell your U.S. house. (He thinks real estate will drop an additional 20-25%.)

3. U.S. stocks will plunge to 2001 levels as corporate profits fall. The U.S./China collapse will affect stock markets worldwide. The Dow Jones and S&P 500 have each fallen about 10% since their peak, but Shilling predicts they will fall 15% more. Based on 2001 levels, the Dow Jones will be around 11,000 and the S&P 500 will be around 1,300. This equates to an additional 15% drop. If the Kospi drops 15%, it will end up around 1,600. However, 2001 would mean 900. =(

4. The U.S. dollar will rally. Historically, the $ becomes the safe currency during a worldwide recession.

5. Real estate prices will fall further.

6. Commodity prices will fall.

Here are Shilling's recommendations:

Sell short housing stocks, discretionary spending stocks (airlines, car companies, consumer electronics, etc.) , commodities, and emerging market stocks.

Buy the U.S. dollar and U.S. Treasury bonds. A 6% return on U.S. treasury bonds doesn't seem very attractive, but it's better than a 15% decline in your stock investments. =)

I don't know if I agree with him, but I believe the U.S. economy is very shaky right now. Also, remember for every bear there is also a bull. However, I respect his opinion because he looks like Mr. Burns from The Simpsons.

Do you agree with him?

You can read Gary Shilling's articles in Forbes magazine here.