The Burning Platform

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — One fiscal cliff down. Three more to go: the $16.4 trillion federal-debt-limit cliff, the $1 trillion sequestration cuts from defense and discretionary spending, and the $2.5 trillion congressional budget cliff.

No wonder investors are being warned of a 42% market drop by Gary Shilling, longtime Forbes columnist, one of the world’s top economists and the author of “The Age of Deleveraging.”

But if you really want to know why American markets are going into another bear crash, check out Bloomberg Businessweek’s latest cover. It will win the Political Cartoon of the Century award for the best snapshot of the totally dysunctional state of Washington … the real reason markets will crash and our economic recovery will be a sluggish handicap race with low GDP growth.

Bloomberg’s cover is a classic: You see a shot inside the Capitol, with “Babies” in huge bold cap letters. Subtext: “The politics of the fiscal cliff deal are outrageous. The economic thinking even worse.” You look closely. No senators. No representatives. All you see are hundreds of babies, whining, throwing temper tantrums, bawling and generally raising hell — just because that’s what crybabies do. Get it? 435 representatives and 100 senators, all acting like immature children.

Red-nosed clowns and screaming babies

And if that political cartoonish image isn’t accurate enough with all those crybabies giving you an accurate image of American government at its dysfunctional worst, look inside at the graphic of the Capitol Dome with a pointed polka-dot clown hat and huge clown nose. 

Yes, the political cartoon imagery has shifted. Businessweek is not alone in seeing Congress as Bozo the Clown. Read the caption: “The fiscal-cliff debate made for more than just clownish maneuvering. It produced a dumb deal.”

Bloomberg columnist Peter Coy concludes his commentary with this: “As Sen. Joe Manchin III, a freshman Democrat from West Virginia, put it shortly before the new year: Something has gone terribly wrong when the biggest threat to our American economy is the American Congress.”

So yes, folks, it really is easy to see why economist Shilling is warning of a 42% market collapse. With hundreds of crybabies running Washington, our economy will just sink deeper in 2013.

Shilling concludes with this dark summary of the coming crash: “With a global recession depressing corporate revenues, unsustainable profit margins and currency translation losses spawned by a robust dollar, I see S&P 500 operating earnings of $80 per share next year. That’s a quarter below Wall Street consensus. Throw in a bear market P/E low of 10 and the S&P 500 Index drops to 800, a 42% decline.”

Yes, Shilling does not see any reason for optimism now. But he does have a great track record as a forecaster. So believe him when he says: “Beyond the fiscal cliff, the economic outlook for 2013 is negative. Most forecasters are paid to be bullish. I try to be realistic,” says Shilling.

Shilling is actually confirming earlier comments in “U.S. GDP on road to zero growth by 2050,” where Jeremy Grantham, whose GMO firm manages $100 billion, says: “The U.S. GDP growth rate that we have become accustomed to for over a hundred years … is gone forever.” And it will decline further: “Going forward, GDP growth … for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.” Optimists hate the drop

Three more cliffhangers

The American economy should be in a strong recovery. But that won’t happen. It’s held hostage by an out-of-control bunch of crybabies and clowns, dogmatic no-compromise ideologues who see government as an enemy and welcome an opportunity to shut it down. That’s even though most experts warn that failure to resolve the three upcoming cliffs guarantees serious adverse consequences — lower GDP growth, a recession, another credit rating crash and a loss of international credibility.

Shilling’s sees “big trouble dead ahead.” Yes, “big,” and, yes, “dead ahead.” He sees nine major reasons that explain why the future of both the U.S. and global economies and markets are “so grim.”

Here are the crucial nine macro trends, all made worse by America’s dysfunctional government, which won’t correct itself for several years:

1. Lower consumer spending

“U.S. consumers are making a U–turn from borrowing and spending to saving. … That’s bad news for U.S. retailers, and worse news for foreign countries that rely on exports.”

2. Financial deleveraging

Wall Street pushed America into a downhill spiral in 2008, and it’s “still rippling through the global system — consumers and businesses are focused on capital preservation above all.” Shilling sees a grim future: “Say goodbye to expansion and growth; forget about a bull market in stocks.”

3. Limiting new regulations

Across the world “governments of developed economies are piling on new regulations with abandon. That’s great if you want to encourage corruption, but lousy if you want more innovation and efficiency.”

4. Commodity prices dropping

Worse, prices will “keep falling as global growth slows,” warns Shilling. “Expect major turmoil and possibly revolution in countries that rely on exporting commodities like grains, metals or oil.”

5. Government spending cutbacks

“Governments in developed countries are forced into austerity and fiscal restraint. That’s bad news for national GDP in Europe, America, Asia, and a disaster for citizens that rely on a safety net in those countries.” Translation: The GOP’s demand for spending cuts, in Social Security and other social programs, may happen naturally thanks to these nine slow-growth macroeconomic trends, without any government shutdown.

6. Protectionism hurts trade and growth

Shilling asks: Does protectionism “help global trade and growth? It doesn’t.”

7. Excess inventories limit investing

The housing market especially “still suffers under excess inventories and has absolutely no appeal for investors. That’s not just bad for employment,” warns Shilling. “It’s downright depressing for homeowners who feel a negative wealth effect.”

8. Deflation dampens growth

Deflation makes buyers everywhere cautious as they wait for lower prices. You want to think twice before you own or invest in any industry that relies on consumer spending.

9. State, local, national, world government problems

And yes, they are in deep trouble. Less money from Washington. Plus revenues dropping, running short of cash, and facing bankruptcies: “Is your community prepared to cope with half as many cops, firefighters and teachers?” No.

Yes, big, big trouble lies dead ahead, at all levels of government — city, state, national and throughout the world, creating a hotbed for more wars and revolutions.

Shilling’s Insight Newsletter is one of the finest economic forecasting letters available. The latest warns against the blind “fixation of investors on monetary easing to the exclusion of weak real economic activity. This ‘grand disconnect’ between robust security markets and subdued at best economic reality, combined with central-bank-set low interest rates, has spawned many distortions and a zeal for yield that almost completely ignores financial risks.”

But this “grand disconnect is unsustainable. Unless the global economy leaps to meet investor expectations, disappointments will follow and … a substantial shock will precipitate this shift and a global recession.”

Get it folks? “Big trouble is dead ahead,” a recession, a 42% crash, with crybabies and clowns screwing up our government.