Money manager Gary Shilling, who correctly predicted the housing bubble that led to the 2008 Great Recession and the global inventory overhang that preceded the 1973-1974 recession, is now forecasting better than even odds of a U.S. recession later this year.

In his January 2019 Insight report, Shilling "puts the odds of a U.S. recession that could be global this year at about two-thirds. The other third would be an economic slowing but no sustained decline."

Shilling has become increasingly negative about his outlook for U.S. and global growth, writing in November that "the recent equity selloff raises the possibility of a full-blown bear market and recession, especially as the Fed continues to tighten credit."

Since then the Fed has raised interest rates once more, for a total of four hikes in 2018, and telegraphed two more hikes for 2019, and the stock market selloff deepened. The S&P 500 lost 9% in December alone, its worst performance for that month since 1931, and it ended 2018 with a 6.2% loss, its biggest decline in 10 years.

Now Shilling, an economist by training, has issued what he calls "a firm recession forecast," based on 13 "recession forerunners" that could conceivably "kill the economic session." They include a further stock market decline and central bank tightening along with declining housing activity, falling corporate profit growth, declining commodity prices and escalating U.S.-China trade war.

The other forerunners are a nearing yield curve inversion, widening yield spread between junk bonds and Treasuries, downward economic data revisions, mounting emerging market troubles, falling global leading indicators, output exceeding capacity and consumer optimism nearing a peak.

"Today, many forerunners of recessions are in place," writes Shilling, but two are missing: excessive Fed tightening and a financial crisis, either one of which helped precipitate all post World War II downturns, according to Shilling.  

The Fed will have a harder time avoiding a recession because the central bank is not just raising rates but also selling off a $4 trillion-plus portfolio of Treasuries and mortgage-backed securities that were purchased as part of its quantitative easing strategy to end the last recession, writes Shilling.

A financial crisis may originate from one or several developments like a "death by a thousand cuts," writes Shilling. "At present … none of recession-spawning intensity are in sight although emerging market woes are a possibility … Contagion could escalate the financial woes of emerging markets like Turkey, Argentina and Venezuela to global significance."

In the meantime, Shilling recommends that investors sell emerging market stocks and bonds as well as U.S. stock market indexes. "The long bull market that commenced in March 2009 is over and a bear market is underway."

He recommends instead small equity positions in defensive sectors such as health care, consumer staples and utilities, owning long-term Treasury bonds and "a heavy cash position." Shilling also suggests that investors sell short bitcoin and commodities such as crude oil, whose supply exceeds demand for the foreseeable future, as well as copper.