If you’re looking to get junior a scary outfit for Halloween, include a mask of money manager James Melcher. Like those ghoulish figures from the film “Night of the Living Dead,” he could frighten anyone.

A few months ago, in an interview in this column, Mr. Melcher expressed concern about the slowdown in housing and its ultimate impact on the economy.

That in itself is not unusual or frightening. Lots of people are saying that. But since then, the outlook of the skipper of Balestra Capital, a New York-based money management firm with $200 million of assets, has turned considerably more dour, which he underscored in a strongly worded bearish commentary he recently fired off to clients.

With the S&P 500 hovering around a five-year high and the market continuing to display enormous vigor in the face of numerous risks, many Wall Street pros, such as Wachovia Securities’ chief investment strategist Rod Smyth, are convinced still higher stock prices lie ahead. “We remain in a clear uptrend,” he says.

To the contrary, Mr. Melcher’s grim assessment, as reflected in these forecasts of financial horror: “We see the potential for a self-reinforcing negative spiral that would culminate in a severe economic recession and a bear market in equities.”

Laying out his thinking, our grizzly, who predicts a down market for the balance of the year and an even worse showing in 2007, observes that small amounts of carbon, oxygen, nitrogen, or hydrogen are easily handled; however, when combined in a particular way, he points out, they turn into nitroglycerine.

Relating this thinking to current events, he notes what is frequently overlooked: how economic factors may interact under various circumstances to produce an extraordinary, unexpected result. And that’s precisely what he sees, noting that American markets are moving toward a dangerous interaction point. The book title “The Perfect Storm” comes to mind, he says.

The slowdown in housing — which Wall Street expects to depress this year’s GDP growth by 1% to 1.5% — is uppermost in his mind. Most experts, he notes, are predicting a “soft landing” in residential real estate with only modest harm to the major homebuilders and mortgage lenders.

Mr. Melcher adds that most people also believe higher short-term interest rates, increased minimum monthly repayment levels for credit card debt, higher energy prices, the inability of households overburdened with debts to refinance homes in a declining market, the fact that wage earners have had no increase in inflation-adjusted earnings over the past several years, and a variety of other seriously negative factors will only slow consumer spending a fraction of a percent.

“We suspect that most of them also believe in Santa Claus and the Tooth Fairy,” he quips.

Zeroing in on how the various economic factors may interact, Mr. Melcher contends the housing decline will be more serious than expected and negatively impact virtually every economic area. By various estimates, he notes, residential real estate has accounted for between 30% and 50% of American job growth over the past five years. If housing sales simply level out, he adds, job growth in this area would stop. In fact, in recent weeks, declining home sales have already pushed real estate employment numbers down for the first time in many years.

By logical extension, according to Mr. Melcher, a continued fall in the housing market will slow the economy’s rate of job growth or turn it negative, with a corresponding increase in unemployment numbers. And this, in turn, will reduce consumption, which will lower employment in retailing and other areas, further slow housing sales, and so on, in a self-reinforcing negative spiral.

The effect on households already struggling with the highest debt and debt service levels in history will be especially severe, he says. Mr. Melcher estimates that well over 50% of American households fall into this category and that most of them are already experiencing some level of financial difficulty or distress.

The threat of a continued housing decline, in Mr. Melcher’s view, is intensified by the fact that over the past three years, many families bought more costly homes than they could reasonably afford. At this point in time, he estimates, about 10% of all homeowners have no equity in their homes and another 10% have less than 10% equity. Further adding to the problem is the fact that hundreds of billions in adjustable-rate mortgages will be reset to substantially higher rates over the next three years. (Other estimates put the amount of reset mortgages as high as $1.2 trillion over the next two years).

His bottom line: The housing market is headed for a “hard landing” and will take the economy and stock market along with it.

So where do you put your money? Mr. Melcher, whose firm is marginally short, views stocks as unattractive worldwide based on his expectation of a broad economic downturn globally. The place to be, he figures, is in short-term Treasuries — that is, judging from his analysis, unless you enjoy losses and see no need to protect your assets.