An Interview With Gary Shilling: Masters in Business (Audio)

we just didn't get to um in our conversation. So I have at various times spoken at different events and and this was an event that was down in the Caribbean. Um. And they have a lineup of different people, this economist, that market strategist, and you sing for your supper. You you speak for an hour or two and then you get to play the Caribbean for a few days. So

it's a good deal for everybody. And by coincidence, I'm on a catamaran with my wife and Gary Shilling and Gary's wife, and uh we're going out to do a little diving, a little snorkeling. UM. I want to say it was Anguila or Antigua, and I never remember which is which, but you know, at a certain point, all those islands they're beautiful, that's sunny, the water is gorgeous, and it's hard to tell where you are when you're

on a boat for a week or so. So we go out to the dive location and it's a bright sunny day and everything is marked underwater. It's twenty feet, it's thirty feet. It's crystal clear waters. And I have a tendency to to even win snorkeling, to like to try and dive deep and and look at stuff. Um and so all of a sudden storm comes in out of nowhere. We come up from underwater and it's absolute from bright blue size guys to totally gray. Can't see anything,

can't see more than ten ft. The boat, which was fifty yards off in that direction, is gone. And I'm a pretty good swimmer, and my wife is starting to panic. What are we gonna do? We're stuck here, and I'm like, well, we have two choices. It's the Carebbean. These storms blew in and out in thirty seconds. We could just tread water here and let it pass, or I'm pretty sure the boat is that way. I have good sense. I

have a really good sense direction. And I said, um, look see where the see where these markings are on the floor, and where the entrance to this dive side is straight line back that that's where the boat is. So we could wait here for five minutes, wait for this to pass. We could go back to the boat.

She goes, take us back to the boat. Okay, So she grabs onto my waist ban and I swim back to the boat um or at least where I think the boat is, and we're swimming for about seven minutes and lo and behold, oh look there's the outline of a sail. Oh that's the cameraman. There's a boat. And of course by the time we get to the camemar Ran, the skies are clearing. But meanwhile I assumed it was just myself and my wife swimming back to the boat.

We look back, there's a line of forty people following us, including Gary Shilling and his wife. It was a little nerve racking for people who either aren't good swimmers or tends a panic a little bit. And so we all get back on the camemar Ran and all of us uh the cat then takes us to a cove with the water is three ft deep, and we all get ripped roaring lye drunk and spent a few hours stumbling along the beach. So that was the first time I

spent any time with h Gary Shilling. We've since remained friendly and UM, I've always enjoyed him and his wife. They're they're fascinating, lovely people and every year he sends a batch of honey uh to friends and family that he raises himself. We spent a lot of time talking about beak keeping, which is pretty hilarious conversation. Um, without further ado, here is my chat with economist Gary Shilling. This is Master's in Business with Barry Ridholds on Bloomberg Radio.

This week on Masters in Business on Bloomberg Radio, my special guest is Gary Shilling, an economist and proprietor of the a Gary Shilling Newsletter and Economic Forecast. A little background about Gary got a degree in physics cum Laudy Magnicum Loudy from Amherst College before getting a master's and

a pH d in economics at Stanford. Ended up on the research staff of the Federal Reserve Bank of San Francisco, before going on to set up the economics department at a little shop called Merrill Lynch, where he served as the firm's first chief economist. Wow, that's an amazing h piece of history. Author of the book The Age of the Leveraging twice ranked as Wall Street's top economist according to Institutional Investor, and a legendary beekeeper, Gary, Welcome to Bloomberg.

Very glad to be with you. So Gary and I know each other for quite a few years. We'll we'll talk about some of our adventures together. But let's start with the beginning. So physics, right, and I keep talking to people on Wall Street with a physics background. How do you go from physics? Would from that to both a master's and a doctor in an economics at Stanford? Well, I like the discipline of physical sciences, and uh, there is a there is a yearning for closure own things.

You you want to fit things together. It isn't just kind of a flash here, a flash there. You want to see how things come out in terms of a total and take some variables, put them into a formula. And it's that's a little oversimplified, but but the whole idea is that there is a there's a discipline to any any uh natural science, physics, chemistry, math, all these things. Uh, they don't have quite the fuzziness that economics has. Now you get into economics, and you know, economic forecasting is

an art, it's not a science. But that discipline, I think it's important because it kind of keeps you on this straight and narrow But anyway, I started off there and then my senior year I had an attack of common sense and decided I wasn't cut out to be a research physicist. So I had a similar epiphany in my senior years, and so I decided to move on.

And uh, you know, it's one of these one of these great developments where um, I was thinking about going to graduate school in economics, and I talked to amateurs as a small school about a thousand students at the time, and talked to the president of the college, and he suggested business school and a couple of other people, and

I talked to the head of the economics department. And I had happened to have when I had an elementary economics course and the sections were taught not by graduate students because there were none, but by the faculty and and uh we talked about it. He suggested a couple of places and then he said, what's your academic record? And I told him. He said, oh, you can get anywhere you want to go. Where do you want to go? And I said, well, I grew up in Ohio, I'm

here in Massachusetts. I've been an allergic sense birth. I'd like to get into a decent climate. And he said, well, how about Stanford? And I said the climate was fine, how about the how about the economics department always one of the top two or three in the country. So he called up, set it up. I got a I got a teaching assistant ship, a resident assistant ship. I never filled out an application. It was one of these things where somebody really did something for it for me.

We all have that going out and went out of his way. And well, as I say, the rest of history, that's fantastic. So from physics, from physics to Stanford, you end up working in standard oil now ex on mobile correct? How did that come about? And how did you go from there to finance? Well it was interesting at that time. Uh, when I came out of Stanford there, Uh, my wife and I were would like to have stayed on the

West Coast. I met her. She was a physiology major at Stanford and UH graduate school and uh, but there are only three places of PhD economists could work in the Bay Area. One was that the San Francisco Fed and I spent a summer there and that was a pretty laid back place. The second was Bank of America when it was Bank of America California, UM the g and Needy uh or origination and UH they sponsored my my PhD research and that wasn't really quite active enough.

And the third one was Stanford Research Institute, and they didn't pay anything. So I told my wife there are two things I'd never never do. One is work in New York, and he was kidding to work. Well, that was the beginning of a great forecasting career, because I took a job as an economist with Standard Alone New

Jersey now ax On Mobile. As you point out, Berry and Uh, well the aggressive story as we lived in a New York apartment for two years, moved to the suburbs, commuter for twenty five years, but in nine nine I moved our shop out to suburban New Jersey. And it's a mere coincidence. It's one point four miles from our house in Short Hills, New Jersey, just just by coincidence. So let's talk a little bit about your time on Wall Street. You not only were the first economist chief

economists from Merrill Lynch, you actually set up their entire economics. Yeah. That that's an interesting story because at that point the bond houses on Wall Street had economists. Henry Coffin was at Solomon Brothers, al Osian Art first Boston, Lynn Santao at Aubrey G. Lampson. Uh. But Merrill was known as a But I was. I think I was the first economist at a stock house Merrill Lynch, And at that

point economists were relatively new. I can remember Bill Freud, who was the economist for New York Stock Exchange, remains a good friend. Uh. And he would have what he called point Freud's friends. All the economis from Wall Street over for monthly lunches at the New York Stock Exchange, and we all fit comfortably in one of those wonderful ornate rooms. There couldn't have been more than twenty of us. Now, how many dozens hundreds of economists are there in the

Wall Street makes a lot of sense. Perhaps it it is part of the reason we obsessed so much on the day to day economic data that seems to come out. I recall less of an emphasis on that ten twenty years ago then we see currently well, and of course there's a difference to the data then. I mean, at that point every economist would have a couple of researcher assist since you get the data by mail, they laboriously draw these charts. There were there were, you know, hardly

any computers. There was no there were no copy machines. I mean, it was and of course that made you think a lot more. You're listening to Masters in Business on Bloomberg Radio. My guest this week is Gary Shilling, an economist and essentially physicist who produces his own economic research and forecasts. We were discussing earlier that you had helped set up the research department of Merrill Lynch and you were their chief economist. You also their first chief economists.

You also have the distinction of being the only person to be fired not once, but twice by Donald Reagan from Merrill Lynch. Tell us how that came about. I went there in nineteen sixty seven and there had not been a recession in the US really since nineteen sixty six. One. Uh Now, I forecast recession for six seventy, which did occur. But it was so different from Merrill Lynch because Mary Lynch at that point it was by listed stocks only. That was the whole rationale of the firm, and the

idea of a recession was very upsetting. So Don Reagan, who was running the place and I had a difference of opinion. Obviously he won. I took my entire staff left, ended up at white Well, another Wall Street house with no idea. In nineteen seventy eight, Mary Lynch would buy why Well. So the story in the street, which is literally true, was Chilling is the only guy fired twice by Don Reagan. So we come back to you, come back to Maryland, they buy white Well. Yea. And how

does the second firing come about? I mean, now, the recessions that was automatic. As a matter of fact, I found out later that that when when Reagan, the first meeting between Don Reagan and Paul Hallingby was head of white Well, that that Reagan said, Uh, if we get together, I want I want to know that there's one employee of white Weld who will not be invited to join the combined firm. So I was out from I was

out before I got in. So anyway, that was the inducement to do what I really had in mind, which was set up my own firm, own firm. So before we go to that, I want to talk about life at a big shop in the late sixties or seventies. What was it like as a chief economist at Merrill Lynch back in the day. It was it was a lot of fun in in in many ways they had a very good UH sales staff, particularly the institutional salesman.

These guys were hungry for input. I was very willing to travel all over the world, not only the US, but Europe and Japan and UH. And it was it was great working for these guys. Of course they were they would they would really get their money's worth. I remember one one salesman Minneapolis where this guy had scheduled meetings with institutions every hour on the hour throughout the day.

I went to the lunch meeting, UM and I get I get my fork ready for the first bite of lunch, and he says, well, Gary, tell us about the economy, and so the UH, the the entree, comes and goes, that goes, comes and goes, and we rushed you out there to the next one. And I say, wait a minute, I didn't get anything. He said, don't worry. I got a sandwich. You can eat it on the elevator on the way down. So they kept you hopping as a as an adjunct institutional sales. So you leave Merril almost

the second time and set up your own shop. You have your own models and your own forecasting set up that you put together. Let's let's talk a little bit about the economy and economic indicators and what goes into your process. What do you think of the most important economic indicators, what do you follow and think has the most resonance. Well, let me say this very just just going into this that, as I mentioned earlier, forecasting in my view as an artist not a science. Now, I

was trained as as econometrician. When I got to Stanford, I had had you know, if you're a physics major, you're a math major two whether you want to be or not. And I was working there under kenn Arrow, Nobel Prize winner econometrician, and and I'd had only one undergraduate economics course. So the the math side, the econometric side was easy. The economic stuff I had to learn. But I have found less and less interest in these big models. They simply do not work. They blow up,

They produced nonsensical. Are they too complex or the You know, that's a very good question, and I don't think anybody has really ever completely answered that. But but but they But the problem is you have to keep going in and plugging in and by the time you get all through, you and do it from from from scratch. But at that time there was this hope that somehow you could devise a model of the economy. It would be unsolid by human hands. You put in the inputs and outcomes

the solution and that's all you need to know. So now, forecasting, in my view, it's a whole combination of things, and it really can't be quantified in any precise way. It's certainly looking at various leading indicators. What's the federals, the Federal Reserve doing or not doing? Uh, what's the state

of consumers? Right now? We think we're in this age of de leveraging, working off access debt from the eighties and nineties, and that you know, I put out this book The Age of the leveraging in and I said, I thought we were going to have two percent real GDP growth, And of course the FED and most people said, oh no, it's gonna pick up. Well, where are we two point two percent since this recovery started in the middle of O nine. But it's it's looking at it's

looking at history. It's Kentucky winding. It's it's a whole most of the Yeah, what is Kentucky wind. That's that's that's a that's a Midwestern term for hunches. Okay, Kentucky wind. I like that. Well, that's that's when you're shooting. You know, those guys were really sharp. They were, so you have to you have to know the wind because the wind pushes the bullet a little bit. Oh yeah, I left.

In fact, I talked to a friend of mine who was a trained as a sniper, and I called him up after I've seen this movie The you know, the American Sniper, and I asked him about that and he explained that that shot the guy made when he took out the bad guy, said that was impossible because the sandstorms and with the with the winds going in and out of the buildings, it would it would cause the

bullet to drift. And even even with all the power of that fifty caliber, fifty caliber rifle is still going to get I have a T shirt I have to dig up somewhere. A buddy gave me, who was a marine sharpshooter, their logo. Their their tagline was why run, You'll only die tired. These guys are serious, serious shooters, and they calculate all that stuff, everything from from curvature of the earth to wind drift. It's all, it's all part of it. So let's hold off discussing the economy

itself to a later segment. Let's talk a little bit about what goes into some of the these models and what goes into some of the forecasts. What do you look at So you mentioned interest rates, you mentioned consumer spending. What other factors do you think are really significant? Well, what's what's also very import important is what is the consensus saying. Because I in order to in order to

push back against or to see where they're wrong. Yeah, I have two basic principles has always been Eid and me. One is that is that human nature changes very slowly over time. So people react to summer circumstances in Simmler ways and others. History is relevant. Now you still have to find the right piece of history. Mark Twain says history doesn't repeat, but it rhymes. And the second one is that you don't add value by rehashing the cansensus.

It doesn't mean you are contrarian, and then you bucket consensus. Regardless, where we agree, we pass over lightly. But where we find something that's important is h is likely to happen because you're judged by your forecasting record, Elemanly. And third is not yet within the purview of the consensus. That's where we really get interested. This week on Masters in Business, I'm speaking with economist Gary shilling uh noted author and forecaster um and physicists for that matter, as well as

an economist. Right out of school, you spend some time in the San Francisco Federal Reserve Office. What was that experience like, Well, it was really at that point point deciding that at least at that at that time, it was a pretty sleepy operation. So I spent a lot of time trying to figure out what indicators led the stock market. Well, that was that was a that was a stupid exercise because you know, you think about it.

The stock market tends to lead almost anything else. If you could find something that consistently the stock market, hey you'd make a fortune. So that was but that was a learning experience. That's what happens when you're young and naive. So let me ask you a related question. Then, what what indicators do people tend to obsess about that really don't matter all that Well, it changes over time, but right now the FED is is pretty much irrelevant in

my view. I mean, you're looking at a period where where the FED has has pushed out all this money quantitative easing, it hasn't done much good. Why is that? Well, it's very simple. Uh, Basically, that money got into circulation and people use it to high assets stocks. But stocks are owned principally by high income people who don't adjust. They're spending much in relation to their assets. You've got three cars in the driveway, You're not going to put

a fourth one in there. So it never got beyond that, and it didn't do much to help the basic economy. It's the pushing on a string, the change in liquidity trap. You can use all the technical terms, but basically the FED IS in my view is it is pretty much irrelevant. And also, of course in this slow growth period um the FED keeps pushing off the day that they're going to raise rates. They're now a lot more concerned with

the rest of the world. Their charter is is strictly domestic, full employment and price stability, but they obviously now are expanding that because the rest of the world is it is a global economy. But I think all in all, the fet is is pretty impetent right now. It doesn't make much difference what they do. So what has been the impact of zero interest rate policy? What's been the impact of of QI on the overall economy? The effect of QUI on the overall economy has been surprisingly little.

It has pushed up asset prices, but you haven't gotten the modiplier effect. Normally, when the FED gives the banks a dollar in reserves by lending and re lending and what's called a fractional reserve system, they turn it into seventy dollars of M two money seventy this point now it's one point four to one, so barely moving, barely moving. Uh And so it really hasn't hasn't had much, hasn't had much effect. Uh So so the FED, the FED is really really I think of pretty much on the sidelines.

And and the other thing about the quantitative easing is that the effects of this lower interest rates is created a lot of distortions, a lot of zeal for yield. You see the rush into leveraged loans, into emerging market debt and equity, into UH, into commodities and hedge funds and so on. Pension funds is still UH still cling to the idea of eight percent returns on their portfolios. They say, we can't get that in conventional stocks and bonds.

We're gonna get it some way. So they move out on the risk curve, and I think a lot of them moved a lot further out on the risker than they realized. I still don't understand where this a percent number has come from. It seems like they've made that number up and that they had to. They want a percent look in order to maintain a tax to for its status. It's five percent is what you have to put out. So I don't know where this number. Two. I think maybe very was five percent plus three percent

per inflation. But but but you don't have inflation, like you know, you haven't got any inflation. But of course the other thing is if they start lowering that number, then they have to lower the other side the discounting rate for the future liabilities, the punch and payments to bring it back to the to the present value, and that greatly increases, you know, the lower the interest rate you're discounting with, that greatly expands there the current value

of those liabilities. So they get hit on both sides. So there's a great reluctance to to face the reality, to be honest about what they should really be expecting. Correct, that's correct, that that's quite fat sinating. So let's talk a little bit about what should have been done following the financial crisis. What should Congress have done? What should the fiddle reserve have done in response to you know,

the collapse and asset prices and and GDP and jobs. Well, bailing out Wall Street probably wasn't necessary, because we very well could have had a full blown financial melch. What about bailing out the bond holders? When we when we talk about these bailouts, a lot of bad bonds were paid out right, and I think that that really has prolonged the agony. I think they probably went too far on this whole and they and they really have way

overrated themselves in terms of what they can do. Listen, look at the look at the whole affection threeon dollar damage. It's huge quantitative easing, and what do we get? Two percent real GDP growth? I mean, it's telling you that these forces of the leveraging are so great they're overpowering this. And these guys who constantly think that policy is gonna is gonna overwhelm everything else and they're gonna get the results they want. I think they're in a dream world.

You're listening to Masters in Business on Bloomberg Radio. My guest today is Dr Gary Shilling. He is an economist, researcher, forecaster. Let's talk a little bit about the present economy. Where are we in the economic cycle. I'm not sure we're in a conventional economic cycle, and of course everybody wishes wishes we were. Everybody yearns for the idea of of a very systematic cycle. And you can see where are you.

I go out and I see presentations. A lot of the big banks have their representatives out and they say, oh, here's a circle, and here's where we are in that. Uh. I don't think we're in that kind of I don't think we're in that kind of world right now. We're going through this massive deleveraging or we're seeing slow growth, we're seeing commadi prices decline, We're seeing the strengthen the dollar. Uh,

we're seeing competitive evaluations against the dollar. Uh. There's a lot of things going on here that I don't think give you a very clear idea of a cycle per se. And one thing I think it is, you know, there's this yearning for nostalgia. We all have that and and forecashers are just as subject to this as anybody else. And you always have this feeling, oh boy, if we could get back to the days when it was a nice cycle and I know that it's four years and

if pounds, I'd be thrilled to death. Yeah. But you know, and equal and people talk about equal, and hey, I've been in this business a long time, very and equal. Everything was something you simply pass through on the way to going to access is on the top of the bottom. Don't value you exist at very briefly swing and in retrospect, that's right. So along those lines, let me ask you a um, let me ask you a related question. I know your historian, I know you look at a lot

of economic data from days gone by. Is there any period in history that's comparable to what we're living through now? Um, that's a good question at times when you're working off access. Is I suppose you could say that to a certain extent outs what was going on in the in the nineteen thirties, but both Great Depression or even yeah, that was a great depression in the aftermath, but there were a lot of other things going on. There, a complete shifting in policy from basically a lessay fair to too

much more government involvement in the economy. Whether that helped or hurt. You know, historians argue about that. I don't think there is a I don't think there is a period right now where you can you can point to it and say, let's follow the script that does that does happen from time to time. And I'm always looking for those periods because but this is unique. You're saying, I don't see I don't see the relevance of that

right now. Can you say this is unprecedented? There's nothing well, at least, and I think in in the experience of modern economic forecasting, it is so um, I know you're a big bond bull and have been for a long time. Four years thirty four year bullmarket in bonds showing no sign of ending. Where are we in this bond? Is the bond bull market still alive? Ye? The yield on the third year treasure was fifteen point to one percent.

And I said in writing, we're entering the bond rally of a lifetime because I saw inflation unwinding and with lower inflation that would push down yields, push up bound prices. And and I think we're still in that. I mean yields now obviously have dropped a tremendous, tremendous amount there more like three little over under three percent for the third year bond. I think we're gonna go to two percent now, somebody in the year on the three year bond.

Now somebody says, well, I mean, what's you know, what does that do for you? And who would accept three percent yield? I couldn't care less what the yield is. I never have as long as it's going down, because that means the price of the bonds is going on. And when you look at the convexity of this whole thing,

if if I'm right. And you go from essentially three percent to two percent on a thirty year uh coupon bond, You make thirty percent on your money, which I think is going to be a lot better than than whatever is in second place, And my mortgage is going to drop to two point nine percent. What does that do for housing? What does that do for other items purchased with debt? Well, of course, the question is under what

circumstance does that happen? If you're in a very low inflationary environment, if you're in a slow growth growth, Yeah, if you're in a slow growth environment, and it has other characteristics. I mean, you look at housing. You mentioned housing. Housing, This recovery has been basically a rental market. It has not been new homeowners that normally are the basis of housing.

They're the people by the starter houses from people that then move up the Latin X, run on the ladder and on up and in housing not really happening because people they don't have the incomes. Uh, they don't have the credit scores. Uh they and and of course it's become you know, it's it's become a virtue as as out of necessity people. Oh, I really don't want to house on my own. I don't want to responsibility. I'd rather live in a more urban environment. Chicken and egg there,

Uh you know which way is a causality. But my friend Jonathan Miller, who's been the show right well does does a lot of interesting appraisal analysis, said that there are so many people with either low equity, no equity, or negative equity that a huge pool of inventory that's normally for sale isn't on the market, and a huge pool of potential buyers aren't participating, so you have few buyers and even fewer houses. Yeah, and there are a

lot of people. You know, it's just like stocks, the idea they take a beating in a stock and they say, I won't sell it till I get out. Even it's irrational because the market is whatever the market is today. But I think there is that there is that pool of of people who owned houses they bought them there underwater, and they're basically saying, yeah, I want to shell, but I can't get out from under it. And of course some people they have you know, they they they're upside down.

They mortgages worth more than the house. So uh, if they sell it, they've got they've got financial problems, to say the least. It also depends if you're in a recourse or a nonrecourse state, if you can walk away or not, or if you can talk your bank into renegotiating the total UH amounts under a number of the hamp and tamp program, if you could do a short sale where you basically sell the market and the lender forgives a difference. I mean, they're all kinds of variations.

So what do you see happening in housing over the next couple of years. Well, I think I think housing is is probably going to limp along here, but I don't see anything really pushing it. I mean, I mean, we're the we're the most over housed country in the world possible exception maybe Spain. I mean, the National Association relators would never tell you that. But well, it's always a good time to buy or sell a house according

to that. Yeah, I remember an ad they had, But that's a great time to buy, it's a great time to sell that. It's always a great always a great time to generate a sales commission. All right, yes, you got it, um, So let's talk about energy, because you've sent some really interesting things about energy. Oil prices of drop cut in half over the past year. I understand you talked about twenty dollar a barrel oil. Yeah. Well, here's the rationale, uh peck, is their cartel. Cartels exists

to keep prices above equilibrium. That's the whole purpose that encourages cheating. Somebody was more than their share, either in the cartel OPEC or outside Russia, American frackers, whoever. So the leader of the cartel's responsibilities to cut its own production to accommodate the cheaters to avoid a price collapse. Well, OPEC has been doing that for years, but they're getting

tired of it. In the last ten years, OPEC production has been flat and all the growth has come in non OPEC sources, a lot of recently from American from American frackers. So the Saudias and their and their colleagues and the Persian Gulf. Back November seven, when we were sitting down to our Thanksgiving turkeys, they decided they weren't gonna cut They basically said, we're gonna play it. We're

gonna play in the labory game of chicken. We got about five billion dollars in foreign currency reserves and work and see, we're gonna see who can take lower prices. The longest OPEC production and with thirty thirty million barrels a day, they took off, basically took off the quotas. It's now thirty one and a half million barrels a day. She say, okay, now, how low the prices go before somebody chickens out, some major producer says, I've had it,

I've got to cut back. It isn't the cost of meeting budgets that's irrelevant here, Okay, maybe it maybe Venezuela is fifty bucks of barrel, that's irrelevant. It isn't even the full full cycle cost, in other words, the costs of drilling the whole laying the pipes, the overhead. So no, no, no, no. When you're a price war, it's the marginal cost. It's the cost once the pipes are laid, the oil is coming out of the ground. In other words, where is

your free cash flow disappear? And in the premium basis in Texas and in the Persian Gulf, that's in the ten to twenty dollar barrel range. So that's how I get to that number. So you can actually see oil full down to twenty five or so dollars a barrel, and they're still making five or more dollars. That's right.

In other words, they may be losing money on a full on the full cost basis, but in terms of the marginal cash in other words, you know, they still have positive cash flow on a marginal basis, so that that's the incentive to keep producing. And now you know price goes down, there doesn't stay there forever, but you but you're kind to get to the point that you have major production that disappears from the system, and we

haven't seen that. There's still the world a washing oil. Sure, oh sure, I mean you know, you're producing about two million barrels a day more than demand. Right now, you're showing floating around filled with oil and no place to drop it off. That's that's quite fascinating. So normally when you talk about oil prices dropping from over a hundred dollars to dollars, we would be talking about a recession. Do you see your recession anytime in the next twelve months.

I don't see the making of a recession. Uh. You have recession, said, at least historically for two reasons. One is the FED raisers interest rates to choke off what they see is an overheating economy. Now, they may have painted themselves into a corner here. They've been yelling and screaming about raising rates. They've cry wolf an awful lot their credibilities at sake. They may raise rage simply to

preserve credibility. But the kind of interest rate like they did in ninety four, where the where they want three inter basis points on on FED funds in six months or so, I don't see that. So the other possibility recession is a is some kind of a shock. That's what we had with the collapse in dot com stocks in the late nineties. That was a housing uh in in the in the mid two thousands, maybe China. So in the last minute we have you you reading my mind.

What's the potential impact of China on the global economy. Well, the reality of China is that it's nothing has really changed their accept perceptions. China basically is not a leader. It's not a self lead comp country. China imports raw materials and equipment and use it to manufacture goods that they send to North America and Europe. So their activity follows. That's where they are depending on that. Of course they have infrastructure spending as well. But but the point is

that it's the perception of China. With a collaption in stock prices and the devaluation, people are suddenly saying, oh my god, China isn't really independently growing. They haven't been for years. But perceptions have reality, and we'll then have enough follow on consequences with effects on commodity prices and

currencies and other developing countries. That's that's that's what's there, and that's if there's a recession out there in the next twelve months or so, I think that's probably where it would would be generated. Thank you to my guest Gary Shilling for spending so much time with us. Be sure and check out our podcast extras where we continue the conversation. Check out my daily column on Bloomberg View dot com. Follow me on Twitter at Riholts. I'm Barry Ridhults.

You're listening to Masters in Business on Bloomberg Radio. Okay, so this is the podcast portion of the show where I stopped worrying about the time segments and we could chat about anything before and I know I have to get you out of here at a certain time, but that'll be easy. Before we started ask talking about some other the questions that we've missed and some other stuff. These are all my questions. I have to ask you

about the bee keeping. You're you're famous on Wall Street for for being a beekeeper and mailing out honey to various people as as holiday presents. Yea, including myself. I have I have a tub of honey, and I believe and you have a different inscription every year, and the one that stands out was the FEDS funny money can't buy this honey. Yeah, this year as treasury bonds saw our bees make more. There you go. We always try to find something topical and usually related to the financial factor.

How on earth did you get into beekeeping? Well, it's an interesting story I've got. We live in suburban New Jersey and I have a bunch of drawer fruit trees around our premises, and I didn't think they were getting pollinated properly. Uh. And I had this based on what what makes you wake up one day and say, I'm not sure our fruit trees A bunch of blossoms are not that much a lot of fruit? Okay, that makes sense?

Very simple road tests Anyway, I had this romantic idea of putting in some bee hives, and my wife kept saying, come on, this is this is this is no far Mrs Suburbia. Well, then our third son, who was an animal ever since birth, did his senior college thesis on bees. And that's all it took to push me over the edge. So in afternoon when wait, wait, wait, he does his his college thesis prompted from you, unprovoked, totally independent, totally independent. No,

there was no leading the witness on that one. So he's doing this and and so uh uh he and I smuggle in a couple of highs one afternoon one. What's how physically well the hive is the vertical essentially, Well, you stack them up, you stack up the boxes. But the but the box that the dimensions are are sixteen and five inc inch wide, nineteen and seven acients long, and they're varying depths. And I can explain to you why they why the dimensions are Okay, this is very interesting.

Bees have have been kept since uh time in millennia. Uh and by the way, honey never never spoiled. They've taken it out of ancient Egyptian tombs which is just as good as the day the bees made it. Really, Yeah, I had no idea. I know it was good for a long time. I don't know it was good o now. Throughout this time though that they had bees, they were in various cavities and so on. There's what's called the skeps,

which is a it's a series of concentric rings. Have you ever seen a Utah road sign beehive state, that's a skeps. You know. It's a traditional kind of round kind of thing. And and and the bees would be in there and they when the left of their own devices. Uh, the bees make it has a hexonical cells, but they look like stags being down. Well, the way they harvested the honey was they basically killed the hive. They would use sulfur smoke kill the hive and then crush the

combs to get the honey out. Well, that was very inefficient because they had to have about twice as many twice as many hives as they were going to harvest. Uh. And also after the advent of kerosene, that's Colonel Drake Droll as well, for lights, there was not the need for bees wax for candles, so wax, and it takes about ten times as much nectar to make a pound of wax as a pound of honey, so this is

very inefficient. In eighteen fifty one eighteen fifty one. Now, honey bees are from the old all from the old world. They came here with the European settlers. The Indians called them the white man's fly. But a congregational preacher in Philadelphia named Lorenzo Langfroft, Lorenzo Langfroft made a very interesting observation. He noticed that the v would only the bee would only build, and the worker bees to do all this.

The drones don't do anything. She would only build her comb within about three ace of an inch of any other solid object, including another another comb. So he developed from that what's called the movable frame five you might you might our listeners may have seen those. In other words, he put these in there, and and the bees they built, they built out the wax coomb fill them upon. He put a cap on there. You can take them out, scratch off the caps, put in a central fuge, spin

them out and put them back. Okay, now coming back to the dimensions. He's the father of modern beekeeping and those dimensions that I mentioned sixteen and five hy those were the dimensions of some scrap lumber he had. It wasn't a conversion from Netrick, but he was so influential that that became. Now it's a convenient size. But the guy never made a dime out of this because it was so easy to copy. But yeah, that and and so that now and you have these These boxes are

various depths. There's usually do two boxes on the bottom that the bees live in year round and they have their honey to get through the winter. They have their brewed in there, and they have um poland, which as the nectar they feel they feed to the larva. And those boxes nine nine and five ah deep, if they're full of honey, they weave eighty five pounds. So the ones you stack up on top are called supers, and

that's the honey we're gonna take off. And they're not as deep as you can lift them, because try try lifting eighty five pounds at at at at the shoulder height. It's it's good for the for the stomach. Monthsls. My dogways eighty five pound. One of my dogs eighty five pounds. And I know when I had a carry him. I know eighty five pounds an to lift um, so that's amazing. So but anyway, start you've been doing decades. Yeah, we'll

start off. And anyway, this their son, Steve. He took off for a job and the euro dollar pits in the Chicago Murk and I and and I had been I'd just been the flunky. He was a beekeeper. And it was like, if you're ever driven with somebody repeatedly to the same destination, they do the driving, you don't pay attention. That was me. He takes off. I'm instantly promoted a head beekeeper. So and I guess why then we were upped about twenty hives and so how much

spaces is physically taking in the backyard. Well, I've got fifteen of them in our residents in Short Hills, New Jersey. And I've got about horror on the grounds underground, underground in a corner of the property. Uh. And but I got about a hundred hives total, and and most of the well they're more further out Morristown, New Jersey area. And then I've got some we have a beach house on Fire Island some out there. But uh, but anyway, but you know, this thing very it just keeps growing

and it's very labor intensive. But I got one. I got a guy on my staff. We spend a lot of time working with me on this. You're talking about the bees labor or your labor, well and both. But but I didn't attend the thing to grow. But the damn thing just keeps growing. How many pounds of honey do you generate? Well? Uh, this year, this year we took off pounds and that's a ton of change of honey. Yeah, and we give it all away. If I ever sold

any i'd have to keep keep keep the books. And I don't want to make myself cry because my time would be probably worth a quarter an hour and probably with a minor sign in front of it. But it very tremendously. Last year was our best year ever pounds and we saw us three tons of hunter. Yeah, we haven't stacked all over the office. And and my my admin, Beth Grant, she keeps saying, come on, uh, we don't

need this much honey. I think she really hopes we don't have a great year because trying to figure out where we're gonna have stacked all over the place. So what if how has these how how has these colony collapse diseases been impacted your highs. That's probably one of the biggest misconceptions. In two thousand seven sixty minutes, the TV show did this segment on colony collapse disorder. Now, what that means is the bees leave the hive and

they can't live long on their own outside. That's clear. They don't come back. Um. And they said, this is the the end of the world. Well, it's actually no more, no more food pollination. About about a third of everything we eat depends on insect pollination, andent of that is from honey bees. In any event, they said at the end of the world. Well, what they didn't really they didn't do their homework, because this is a reoccurring problem. Uh,

it's about every twenty five years. The first observation of this country was eighteen sixty nine, and it's gets on the way. Now it's not the problem, but there are but there are other serious problems. Uh well uh And as a matter of fact, they just had a huge

study announced last year. All the big name U. S. D A. Anomalogists and the guys from the big schools where there you know, like Cornell and University of Maryland and Penn State and U C. Davis and so on, and they came up with three three areas, and everybody's waiting with braided breath for what's the problem with bees? How do we get out of this? The first one has to be that's interesting, It isn't uh no, that's

the first guest. Pesticides. They said, maybe, but they're not at all sure, and interestingly enough, their European counterparts were absolutely possibly convinced it was pesticized, and two months ago these Europeans said, we're not so sure. But that's one. The second one is nutrition, farmers, fence, farmers, plant fence, road defense road and there's not a lot of wildflowers to give bees the the nectar and pollen that they need.

So what they're doing is there encurreaged road defense room, meaning it's all cast crops, crops most of them don't tend to have any nectar that are Pollen's interested in the piece. But what they're doing now a lot of cases is uh they're encouraging. They're encouraging farmers to use marginal land to plan there. There's an outfit, for example, called h called pheasants unlimited. Uh. They're in the Upper Midwest, and they basically raised pheasants and quail for for hunters.

And and what they do is they provide the seed to farmers and and uh, and the nectar and pollen are as good for the bees, and then the seeds that chicks the pheasants and the quail chicks eat it, which makes them better to be harvested by the hunter. So there, and then the third that's fascinating because there's a farm near where I live, which is where I get my peach raspberry pies, called Young's Farm, and I

noticed they have rows and rows of plantings. And then along the edge which is adjacent to the street, probably not harvestable. They have just a whole run of wildfire. And that's that's what's being done. And that's that's helpful, but it's you know, it's not on a big enough scale. Then the third problem, which is probably most interesting, is a parasitic mic called verroa v A r r O. Read something about this. Now this is there there are

five races of honey bees. The only one that's commercially valuable is UH. The Latin. The scientific name is APIs malafra APIs b malafra honey. Um. Now that one orange original bees are off from the whole, from the from the old world. This one originated in in uh Southern Europe and the Middle East. There's another race in the in the Southeast Asia called APIs Serena. And this this roa mite is indigenous indigenous on APIs Serena and APIs. And this this roa mites hangs on the bee, sucks

out there quota or blood. APIs SaRenna recognized this as the bad guy, and they grew them off each other. They pull them off each other. It jumped over the Apisa and they don't understand it's a bad guy. So you and and so one they co evolved together, and that's how they managed to whoever figured out you need to take this off. Now we see their offspring around. If you didn't co evolve, you may not have developed that behavior. But but now they're they're they're right. Now

you've got to treat with chemicals. Um are absolutely positively that high will be done in two years now. Yeah, yeah, you don't treat until you take off the honey. But we're gonna eat, of course. But they're but they're doing

some interesting things. Monshano has some interesting work where they kill the mites believe the bees that you're trying to kill one insect without killing another insight, and they're and they're using some genetic uh, some some genetic modifications to basically in effect try to disrupt the breeding cycle of of the mice. That's a that's an experimental stage, but that that has that's probably the greatest thing. But this is this is a serious problem. And the thing is

he's mice mutate. I mean that the treatments that worked just beautifully ten years ago are worth anything because they mutated, and the ones now sounds like penicillin resistance. It's a how did you get from? It's amazing how first of all you you've obviously studied this in great detail, But as an economist, I don't really think of the next logical step as well. Of course, beekeeping should be well that there there are, there are, there are, and treads

aybury and such as okay, well let's see. Well the one that is not common but I like is it's good physical exercise and particularly on a nice day, I like to be outside. Uh. And you don't get a lot of that when you're sitting behind your desk on the lecture circuit or whatever. But you see the distribution of labor amongst the hives, that's got to be an

entire Yeah. But the other interesting thing is that this with all these diseases and pests that beset honey bees in the last couple of decades, it is Uh, there's a whole logic, deductive logic sequence I go through when I open a hive. I open a hive, I'm looking, I'm listening, I'm smelling. Is there a coin there is she laying? If not, what do I do? I come home from a day in the in the b yards out with the bees, I'm rung out, not only physically

but mentally. You wouldn't think that, but it is. And and beekeepers tend to be above average intellect. You've got to have a natural curiosity because and another interest. Economists just average inte life. So so bas you're saying that the beekeeping is a greater intellectual challenge than No, I'm not saying greater, but that's what I'm here. I'm hearing. Anyone can be an economist to be a beekeeper. And I know economics, it's plenty, but it's it's it's a

di virgence. It's it's it's sort of a you know, I'm a type of guy. I always work. I just change the venue and and and that's what it amounts to. Where you're you're shifting, you're shifting gears to to something else, but you're still going through that that mental process of trying to figure out what's going on there. It's like it's like the economy you're trying to you're trying to put all that we talked about this earlier, trying to put all these pieces together and see where you come out.

And uh, and you're never can be certain and and and be keeping Hey, the visistant visistitudes the nature are tremendous. You do everything you possibly can. It's just like a forecast. You cover all the bases and you're you're left a certain amount of luck some rents from then. You know. I just I just was speaking at a conference and the exact same convert station came up with you do X and Y and Z. They all seem so different.

In my answer was they're really the same thing. You look at a variety of ambiguous inputs, try and figure out what matters and what doesn't and reach a reasonable conclusion within the context be keeping in economics, apparently the same same basic the process is what's so similar even though it's totally different. Um that that that that's quite fascinating. So earlier we were talking a little bit about, um, what it was like when you were researcher at Mary

lynch In a researcher at the Federal Reserve. What what are some of your commentaries or research forecasts that you're especially proud of that really have stood the test in time or may have been unusually contrarian. What what stands out to you? Well? I think I think the greatest call I made was just one. I made a bullmark that we're entering a von Rally of a lifetime. And was that a lonely call? Where there are peoples? Barry was so lonely. I wrote my first book in title

The title was is inflation ending? Question mark? Are you ready? Question Mark? My answer to the first question, yes, Yes, inflation is ending. We're going into a period of of lower and lower inflation because my view is at government excess spending is the route of inflation. The FED may be the handmaiden and implementing you. But it's the government spending. And we saw a revolt against government, starting with Proposition thirteen in California in nineteen seventy eight and then Reagan's

election in nine eighty. And I said from that that inflation was on the way out, and as a result, we were. And so the answer to the second half of the question, are you ready, no, because everybody was betting on inflation. They had all their tangibles and their portfolios, uh, coins, antiques, artwork, goal, etcetera. And I said, no, no, you don't have enough stocks or bonds because they will benefit from this. Now, that

was a very lonely call that book. Mcgrawl hill finally got it out in nobody but inflation really peaked in nineteen eighty, but nobody believed. The sales of the book were an absolute disaster. As a matter of fact, McGraw hill gave us the last couple of thousand copies. They didn't want him. But it was but interesting in six By then it was clear that inflation was fading. Uh.

There were two ex post reviews. One was in the Boston Globe and the other was a Seattle Post Intelligencer and they both you know, and both of these business editors said, I saw this book, Oh my god, it was happening, and they and so they wrote reviews. Well, of course that was his hand as a pocketing your underwear because the book was long out of print. But it was a paric victory. But but yeah, I mean

that was that was very longly. I don't think there was anybody else, at least notable known forecaster who was saying anything like that. So so let me push back about your your claim that it's the government's bending and deficits that cause inflation. We have a nineteen trillion dollar federal deficit and yet inflation is well non existent and

and going hard. Yeah, it's it's uh, yeah, I have to fill that out and say, it depends on the rest of the economy if you have an over employed economy to start with, and then you put all that government spending on top of it. But what you see, that's what happened in the late sixties and seventies very different today. You had, Yeah, you had a huge government spending on war, on poverty and war in Vietnam, and that really strained resources on top of a twenty year

private sector bull market generated generated all that inflation. Well, again you've got the reversal that starting. And so now we have the retiring boomers, We have a whole lot of underemployment. People working part time would rather work full time. Um what else do we have in this environment? You have increased global Yeah, that that's that's I think that's been the greatest The greatest change in the last thirty

years is globalization. And so let's talk about globalization, but I also want to get to I also want to get to increased productivity and increased automation as other factors that are driving this. So what has been the impact of globalization on wages both here in the US and worldwide? Well, it's a great equalizes are of wages obviously. UM. I had was very interesting. This goes back years ago. Milton Friedman had read one of my books. He was in

San Francisco. He invited me in. It was in an apartment there, uh greeting me at the door, hadn't shaved in three days, had a bathrobe on. We sat there for about three hours talking about about inflation and wages and of course what was this Oh gosh, this was

this is about the mid eighties. And and his point, of course is that that free markets govern everything, that there's nothing else but and and uh and and I was saying, well, you know, wages, you're here, You've got an hour you know for the U A W I think in this country and two dollars an hour in Mexico. And I said, you know, you think it's gonna happen, These are gonna equate. Well, they have come a lot closer. And and that's what that's what's happened, is that is

that this is globalization. And of course you had a lot of American labor which was enjoying, uh was enjoying the fruits of basically isolation. I mean, we did not have global competition. But that's clearly changed. Yeah, that that's clearly changed. And so what it means is that we simply can I compete in in uh, basic manufacturing or anything. Even services. You know, you talk about doing routine legal services. They do that in India, any place they speak English,

call centers and so on. So globalization has been a very very important factor. And we're dealing with the we're dealing with the aftermath of that right now. So let's let's along those lines. Let's talk about demographics and retiring baby boomers. What does that mean for the overall economy? What does that mean for job possibilities and wages? Well, what's interesting about that is that is that people are retiring.

As a matter of fact, the reason the unemployment rate has come down uh is UH is basically the people dropping out of the labor for what percentage of the fall from ten point whatever to five point one percent unemployment is people leaving the way little labor for well,

let's put it this way. If you didn't have if you hadn't had the if you hadn't had this participation rate, which is anybody sixteen and over who is either at working or actively looking for work, if you hadn't had that decline from the peak in February of two thousand, the unemployment rate today would not not not so that many people have left the workforce but are still of working. Well, well, no, no, no, that's everybody. Now, we we've got a lot of work

on that. About six of that are people are over are people retiring the post of as retiring, but are middle aged people who said, you know, I can't find a job, And of course, a lot of younger people who said, I'm going to stay in college, I hope I get a better job. Of course a lot of them came out with big deaths but no better job prospects.

But what's fascinating about this With older people, and you're talking about retiring poster or babies, the participation rates of people UH sixty five to seventy four have gone up, still pretty good lower, they're lower than younger people, but they're going up and over seventy five. And why is that? Two reasons. One is people in better health, they're living longer, they want to stay actively. Also, a lot of people simply do not have the access to retire, So you're

getting some very interesting diamics within that. But but the bottom line is there are a lot of people out there now training, having the skills to take jobs. That's another issue. But if if you assume, if you get people properly trained, there's there's really no shortage of labor in the foreseeable future, that's amazing. So let's talk along related lines. Let's talk about productivity gains and you directly automation.

What is the impact of Like in my office, I know, we were six seven, we're now seven people were about to be eight people. I know that to do what we do thirty years ago would have taken fifty people, and thanks to computer technology and software, each person does. We don't have a bookkeeper. We outsource that to uh an accountant who looks at stuff quarterly, who sees everything online. A lot of the stuff that we used to do with an assistant and a secretary, we that's all automatic.

It's all done on the on the everybody types. It's not like you can be an executive type. And so you're doing entering everything into the into the computer. And then when you look at different tools like like what we get from Salesforce as an example, as a sales management of CRM tool, that would have been somebody's full time job and now it's one piece of software for eight people, it's amazing how much more productive each of

us are. What does that do to to job creation? Well, uh, you know, the whole the whole idea of industrialization ever since the industry revolution started in England and New England in late seventeen hundreds, was that it destroys a lot of jobs. You know that, you know that the origin

of the word saboteur okay, sabbath. It comes from sabbath which were wooden shoes, and earlier the ductal Revolution, the workers wore wooden shoes, would grind him in the machines, direct the machines because it was putting people out of work. They wanted to go back to hand weavers and ah as. You've always had this specter of of the destruction of

jobs by automation. But but what has happened. Of course, it's created more jobs, and higher level jobs and higher page jobs with more productivity, and that's the basis of living standards. We've come to a we've come to a

bit of a gap recently with globalization. That's one of the reasons I think globalization is so important because it's given you this huge gap, in other words, more rather than a gradual increase in this transfer and and and upgrading and so on and getting rid of the secretaries

and the in house accountants and all the stuff you mentioned. Uh, that's happened overnight, and it is simply left a lot of people in the US and other western Western economies who simply are are not making that transition and not prepared to that and it may be a generational deal, and I don't think it's the end of the world, but it is a it is almost a a quantum

shift shift there because of globalization. So so you mentioned that as we've gone through the industrial era and as we've seen um more and more heavy manufacturing put people out of work, but at the same time creat other jobs.

When we look at technology technical especially biotech, internet, computer technology, the amount of job loss that that's created, is that really going to be offset by new and related jobs in that space, Because that's the big concern of a lot of people, is that there are people who are creating software, creating technology that allows each person to do so much more. You've eliminated a huge swath of jobs. The jobs are being created just where that Where are

they geographically? In other ways, are they in this country or are they in China? And now low end manufacturing moving on from China to lower cost areas Bangladesh, Vietnam, Pakistan and so on. Well, we see the iPhone which is designed in the in the United States, design in San Francisco, but essentially it's manufactured in China, with components and other parts made all of the world. But the

bulk of which are in low cost countries. So what is and yet there's also an app economy where all these software designers and all these people are making a whole run of different software to put on that that work pretty much anywhere, but they're mostly the United States, UM, Europe, India, Japan, places like that. So is that technology creating more jobs?

And it's creates creating more jobs, and of course it's it's adding to income polarization because those are those yeah, those are those are high skilled jobs, those are high paid jobs. But what you've eliminated are these auto factories in this country that employed five thousand people that that's

out Now. One of the interesting things coming out of this, and particularly with what's going on right now, we've had eight years of basically no real income growth in the US and really Europe, Japan they developed world nowers adjusted for inflation, no no growth. People get frustrated after a while of that, and what's happening. We're beginning to see that expressed politically. For example, in France, the National Front headed by this woman Maria la Penn. She may be

the next president of France. It's a very you may end up with Bernie Sanders or done Trump in the in the US, and and of course John Baynor, you know, and there's this reaction to politicians in the center and looking at the fringes UK the head of the new head of the Labor Party. I mean, you're getting very

interesting expressions of this. UH. And of course you know we're not talking about French revolutions now where people out there tear it down the beast steel, but it is it is a similar kind of impulse and we could get some very interesting political ramifications. So we just saw that in Greece with Left coalition. Although I will tell you the craziest thing, so we're recording this UH in the beginning of fall two thousand and fifteen, so we don't know the outcome of the election for any of

you in the future listening to this. We don't know a lot of things. But one of the things that I find fascinating is when you look at the shocking and sudden rise of Donald Trump politically, he's much more centrist then either the bulk of the Republicans on the right and the bulk of the Democrats on the left. I'm amazed that when you strip away the bluster. He's kind of a centrist, old school politician. How did who would have saw that coming? A few Yeah, but you know,

it's a hell raising aspect. It's like what was that movie Network News where the guys because you know, I'm not going to take it an Yeah, absolutely, I mean it's it's that it's that same kind of the same kind of reaction, and that's what he's Bernie Sanders. I mean, of course he's way to the left, but it's that same kind of same kind of appeal. It's kind of saying, the centers politicians have not solved the problems. We got to do something else, and and there's a there's a

big hearing for that kind of thing. So this is a this is a this is a kind of a cycle within the cycle, if you want to use cycles. And we talked about whether they're relevant or not. But you've had you've had globalization going on for you know, about three decades. But now in the aftermath of the global Great Recession oh seven oh nine, we're having this period of slow growth, as I called the age of

d leveraging, no no growth and real incomes. And and as a result, I think the combination of these things is putting a lot of pressure on the political system and and the conventional politicians really don't know how to react to this. So let me ask you a question

about that. And I'm not sure where I pulled this number from, but there was some news article out not too long ago that said, the middle class has not seen in real terms, um forget nominal terms, but in real terms, has not really seen wage gains since nineteen three. I think that's I think that's I think that's probably valid. Yeah, if you look at if you look at real wages and uh, you know that pretty much is that their insurance costs are up in the Indian real family income,

That's that's what those statistics show you. And and you know the growth has has come on on the on the top. There's a lot of income redistribution to look people on the bottom. And you know, people can say, oh, this is this is terrible, and of course the pope is that was his theme as as well. But you know, you say, if you if you have rapid growth, if you have a dynamic economy, it is going to sort out the people who have the skills in order to participate.

You look at China. Look how many billionaires are in China? And you say, well, yeah, but this is a country with a average income of what about a sixth of what we have. But yet when you see dynamics the people who take up, now you can say, well, that's not that's not equal distribution. But that's a judgment call, that's not a market call. So what does the United States need to do to sort of restart that economic engine and go from forget five percent, how about going

from two percent to over three percent? Well, I think I think a certain extent, it's really just a matter of having patients and letting this whole agent be leveraging and run its course. Now, once people are no longer buried with debt they picked up in the last cycle, that's right activity that's after that, we are going to see a return to rapid growth and it will be led by by technology and productivity. So you're up for a guy who's says the bond bull market is still here.

You're fairly optimistic. Oh, I am in the long run, very much so. And one of the reasons is my basic philosophy. You know, I mean, right now, the easy long term uh forecast to sell is slow growth forever. Because everybody looks around us. That's what I see right on, brother, You look at people like like Bob Gordon, Professor Northwestern. He's going around saying everything that is really productive, that's

worth inventing, has been invented. Modern, by the way, we've heard that throughout the centuries, and it's always been wrong. Modern ma enthusian, and it sells very well. Neil Ferguson at Harvard, Uh, things are being dragged down by dragged down by regulation and so on. Larry Summers, you know, democratic fergusonsest stick to history. He's a terrible economic connentator. Every time he talks about economics, he manages to get something. Well,

it's not major. But what what I'm saying, Barry, is that that's the easy cell. And you know, I'm always yeah, it's yeah, And I'm always looking for, you know, where's the hidden flaw that that's that's that's how I made my career, is looking for where's the where's the why is it going to go wrong? And in this case, you know, for example, they say that, uh, Gordon says

that the Internet and so on is finished. Computers, it's all realized I think those things are more in their infancy than there are for I mean, just just you be a couple of examples. The American Industrial Revolution started in the late seventeen hundreds, grew like topsy, but it didn't get big enough to move the economy until after the Civil War. I mean it ter yeah, railroads again they started l seventeen hundreds, not until the latter half of the nineteenth century. I mean, it takes a long

time for these things. And you know, you look at you, and I have have cell phone. I mean this has got more computer partner I b M three sixty this this little gasht in your pocket. I jokingly tell people there's more computing power on this than took Man to the moon with it really is. And and I look, and I was taking some pictures and here I am on our beach house here, you know, at home around I've got just where it records where it is. I mean,

it's a big brother knows where you are. But but but my opinion that we are more in the infancy than we are finished on these new technology. Biotechnology, I think is is much much more in its infancy and what that is going to do for productivity growth in the future. Now again, you're gonna have people who have the right training. But you know, one of the problems we have in this country. One of the problems we

have in this problem country. And there's a different topics, but I think related is the education system and and and you know, we have the attitude, Um, we have the attitude that everybody ought to go to college. And it is true that people with college educations make more than high school grads. But you can't prove causality with statistics.

I guarantee you positively, absolutely, every time there's a total eclipse of the of the sun, if you go outside and beat a drum, it will go away hard percent correlation, no causality. The reality is, in my view, smart people go to college. But college doesn't make you smart. And I think we need to recognize that and say, Okay, there are a lot of people who can have very credible jobs. Hey, what's the last time you hired a plumber to clean out a toilet? News charge your hundred

bucks for fifteen minutes work. I mean, you know, there are a lot of jobs that are not college educations, but they're certainly very credible. There's six estimates are the six hundred thousand jobs going begging now for people with computer skills to work in factories. And one of the things that's happening to solve that is the Germans. They

have a very strong apprenticeship program history. They brought a lot of their plants in the southeast and this country and they have these apprenticeship programs combined with two year community college degrees, and these guys come out and they're very well paid. And American companies are emulating that same kind of thing. So I think that's one of the most exciting things in education that this isn't say everybody, and you know, we have a college for any for

any intellectual capability in this country. Look at the poor profit college is absolute disaster total. They wouldn't exist without government subsidies and it is just a waste of moth. They came about on their own. Beginning, there was a huge movement to the private sector can do this on their own. And once they figured out they could suckle off the teat of Uncle Sam, they were all over and there. Sure, and you know it's an entrepreneur Okay,

why not? You know, you know, because we know where it helps making the money money, the old fashioned way, skill luck, Clair biyance Brand's higher work, and so much government subsidy you can't miss until they collapse under their own way. So so you're really a pretty optimistic guy about the future of America. I am, I am, I am. I think we've got to get through this. This, this the leveraging. How long does at last? Normally? You know, if you look at the Ryano Rokoff data, it was

waiting for it goes ten years. Now they are that data is over centuries. It's developed countries, it's banana republics. There's a lot of apples and oranges recently, but right now, right well recently, you know, if you go back to the thirties, it was about ten years. We're eight years

into this now. At the rate we're going, it may take longer than another two years to complete, but I'm convinced that it will be twelve years, fifteen years maybe something that if you use if you use a straight line, the financial sector in this country has probably got another uh, five or six years ago. The consumer working off xces Stat's probably maybe a little bit longer, maybe seven eight years. But that's just drawing straight lines. So you're guessing we're

halfway through. And as I mentioned earlier that one of the really interesting questions is is our is the electric going to have the patience to go through this, or we're gonna get a react action. We're gonna get some oddball uh in oddballs in Congress and administration. Are we going to see a big push for goverment stimulus? And if we do, I think it will be fiscal. It won't be monetary, because you know we've already I think we've exhausted the monetary Yeah. Well that's the traditional listen.

Following the Great Depression, even following the two thousand recession, we saw a huge surge of fiscal stimulus that's been more or less missing this go around. What what would the impact of that be to the de leveraging process. Well it uh, I don't know that would necessary, it would necessarily reverse it. I mean, but it it could mitigate it. It could speed it up a little bit, speed it up a little bit. Yeah, and could speed it up. I just want my roads paved. You know.

People accused me of being uh, well, well you're a big guy. No, No, I'm tired of replacing axles I want you know my run flat tires show up as flat because there were so many people know that. That's That's a big difference between monetary and fiscal policy. Monetary policy is a very blunt instrument. The Fed and other central banks you can raise and lower interest rates, can buy and sell securities. That's yet and beyond that, the

ship's fallwhard and you don't really see that immediately. Yeah, the ships fall where they may. Fiscal policy can be pinpointed. If you want to improve the roads, you put money into road construction, if you want to help the unemployed, increase unemployment benefits. It can be very very specific. It doesn't say it's going to be efficient, doesn't say it's going to be I'd like our electrical grid to be upgraded. It's it's terrible. It'd be nice if our ports were secure.

We know that they're still vulnerable to foreign or terrorist attacks. And I are on the same page here. I think infrastructures is really and if you go if you travel to Asia or Europe, our cellular system is awful, and our broadband, where we essentially created this technology, we're now the back of the but we are terrible compared forget Korea, who kicks our but most of Europe is three to five times faster than US and cheaper. Yeah, it's in credible. Yeah alright, so I know I only have you for

a few more minutes. Let me go through some of my favorite questions to ask people and we'll get you out of here on time. Um. So, before before you came to Wall Street, you mentioned you're working for Standard Oil. What what did you do for them? What was your pre Wall Street experience? I was an economists there. They had what was called a general economics department. They had uh economists that covered various segments of the world. I was in charge of the US and Canada in terms

of forecasting and analysis of the economy. And that was a time when the major corporations they had two things they knew they had to have. You couldn't go to lunch with your fellow CEOs and other wizards without having them. But they didn't know what to do with either one. And one was econ economists and the other was computers. That's fascinating. So from that you decided from that and from that I decided, Uh, you know, in Standard Oil was it is a huge company obviously well run company.

It's going to be there forever, but it was fairly bureaucratic, and I wanted to imagine a little more active, and that's why I went left for Wall Street. So, so let's talk a little bit about some of your early mentors who really influenced your You mentioned the professor at Amherst who impacted your your career clearly mentor who else was a mentor of yours? Um, who influenced your thinking? I'm not sure I could name I. You know, I thought about that earlier. We talked about that, and I'm

not sure I could I could mention. I mean, I I never, for better or worse, very I don't think I ever had had the mentor. So let me ask, let me rephrase that question slightly differently. What books throughout your lifetime have you found especially influential? Um. I guess some of the some of the basic books on the economy and and uh um. But I think it's been more the philosophical aspects and some of the some of the some of the great thinkers who give us some examples.

You mentioned Milton Freedman or earlier. Yeah, certainly, I know you don't agree with everything. He said. You know, Kane's had a lot of interesting things. Um. My two thesis advisers of Sanford ed Shawn Jack and Jack Early. They came up to the idea that money pervaded in finance and everything had a degree of money, even insurance policies. Uh. But um, I can't say that I really studied under you know, one great mentor and U or another. So

so let's talk about the financial industry. Obviously a lot has changed since you first joined Wall Street back in the late sixties. What do you think is the most significant shift we've seen you finance over the past forty years. Uh, it's probably the poriferation of financial instruments. When I when I got in, uh to Mary Lynch, and that was in nineteen sixty seven, you had fixed commission rates. Um, everything was pretty well regimented. No competition, no, yeah, no

real competitions we know today regulation. I mean they even had resale holes, uh, fixed retail prices. You couldn't go into the store and buy you know, couldn't buy to a toothpaste where the price wasn't fixed in many cases. Uh. But I think what's happened is first First, first of all, you have opened things up with allowing competition starting with may Day and a fixed commission race in nine, and then also the proliferation of computers and an ability to

trade and moving away from individuals curities. I remember Mary lynch Uh their trading operation that was looked like a race track where they had these belts that went around in a in a big view and a guy would take an order and stick it in um in this track and would go around with the guy on the other side. It would process, and I mean, you know it's it now. You push a button and it yeah, I mean, you know, music and well, and not only that, we're at the point now where these guys want to be.

It's so fast that they want to be a short a distance physically from that hundred and eighty six thousand miles a second, okay, but they want to be half them closer. Don't travel that fast. But you know, I mean that that kind of thing has has really and if you remember the beginning of The Big Short if you met that book by Michael Lewis, they talked about all of these high frequency trading op brokerage firms that locate just outside of the Holland tunnel, so they're the

closest to the feed from from all streets. And then these guys from Chicago laying a fiber optic cable in a dead straight line, didn't care what was in the way, mountains, houses, just buy it and blow through it. And now they're replacing that with you know, over the air microwave point to point broadcast, so you don't even have to lay fiber optic. You can just go. You have to have a series of jumps because the curvature of the earth gets in the way. But that's how important speed was

to those guys. And and and the question is are we able to handle this uh in terms of the effects of this. And we've seen this with you know fair uh seven uh stock market nose dive one one day. We've seen him with flash crashes into bonds, and more recently we saw that with the E T F crush And and yeah, and and the question is are we are we really up to speed with with this? And and then you have a much better question. And this goes back to a lot of what we talked about

about automation and so on. Has that made us any better decision makers? I'll tell you one one one one uh one book that I always read. It's a whole bunch of them. It's it's Shakespeare. I'm a great fan of Shakespeare. And you go back and you say, you know, first of all, that guy said things in an elegant way that none of you know, every the best line I've ever written is going to be big, is worse than the worst line he ever wrote. But you look

at these and you say, has anything really changed? How are we making any better decisions with all this technology and speed? I'm not sure we have? And is this this mean that it's given us more confidence that we're you know, we're going bad and with more confidence than before. I mean because you think, well, all that data is available and so on, So I'm not sure that that we're able to synthesize that data any better. And and

of course everybody else has the same data. And are you any better off really in terms of for you know, you're a forecaster, I'm a forecaster. Are we making better forecasting? We did twenty years ago? But it's feels to me that all this technology and all this high speed um not specialists, not people who have an obligation to make an orderly market. It makes it feel like the market structure is a little less stable or a lot less

states Well, I think that I think that's true. And and and you really say, is that is that simply part? Is that part of the you know, does that go with the territory? And you just have to expect these periodic uh glicies and and and and uh, you know the puke point you reach me occasionally is it is this this part of the whole deal? And you you live with it? And I say, that's that's part of

the deal. But but you know the thing about finances, finance, fundamentally, the justification for finance is a grease the wheels of commerce. It's it's if we had a barter system would be pretty if it would be pretty rough? Uh too much

what finances? But I think finance, and particularly leading up to the collapse of nine in two thousand a, a lot of those guys felt they were an end of themselves and they're only their only job was to make money, and they didn't really think about are we contributing anything? Are we improving productivity? Are we are we making it possible for investments uh to get to get productive things? Done in the economy, and I think there's I think there's a lot of site and loss of of what

the ultment game, ultiment objective of finances. I couldn't I couldn't agree more so that's historically looking back. Let me ask you, UM, next question, what do you see as the next important shifts in finance going forward? UM? Oh, gosh, it's probably gone to do with globalization. UM. So no more less of an impact of national borders than you have. Yeah, I mean, you know, you mean that the technology is there, and yet you do have you still have, you know,

separate right regulations, separate exchanges. Um. There's there's a lot of of particularly in Europe, where they're trying to combine this but on a on a global basis. But you know, when when money can move around, move around at the touch of a touch of a key stroke. Um. The idea that you're moving into different regulatory jurisdictions because guys are always going to try to game system, they're going

to look for the lowest regulatory climate. And I think that's probably something that's we're going to see is a lot more global control of of financial flows, not not control in the sense of big brother, but just common regulations so that it's it's all under the same all under the same regulatory framework. So so down to my last two favorite questions. And and let me ask you this. So the millennials, the people are just graduating college who

we were discussing earlier. If one of them approached you and said, Gary, I'm interested in the career finance, what advice can you give me? What would you tell them? Uh? Other than other than to become a great economist, of course, Uh, I would. I would probably advise them to try to find an area where you are doing something is productive and you're not just glorified shuffer of paper. Uh. Trading. Trading is important. It lubricas the system. But but trading

just for the sake of making money. I mean, you look at you look at corporate finance. Um, if you go back, you know, take Goldman Sacks that used to be an investment banking house and and their job was to their job was to work with clients and to raise money for them to do investments and productive things. And it was a win win situation. Uh. The client got the got the issue place, investors were satisfied with it most of the time. And and uh, the investment

banker got a fee. Okay, now what Wall Street has evolved in his trading houses, and that isn't a win win situation. It's a zero sum game. There's a winner and a loser. Whether it's not like every it's not

like the pie is getting bigger. I don't think if I were advising somebody, I'd say, I don't think you ought to be in that, uh, in that zero sum game business, because I somehow well, I don't think it's uh, you know what, whether whether it just makes a lot of money for you and you and you moved to the Hamptons and so on, but it's not fulfilling and it's not but I'm not sure. I'm not sure how

sustainable that is. And then my final question, what is it that you know about investing and finance and economics today that you wish you knew when you began way back in the nineties sixties. Mhm Uh. It's probably a lot more respect for the unknowns out there and the vicissitudes of nature, and the realization that the best laid plans of mice and van gang Off the galat that you can that you can have a great forecast and all the fundamentals fall into place, and markets just simply

do not confirm it. And the way I put it is marcuts can remain irrational a lot longer than we can remain solvent. I've heard that somewhere. Well, Gary, thank you so much. This has been a delight. Um. If people want to find your your newsletter or your research, how do they go about tracking you down while they can track us down? It's our website Www. A Gary Shilling dot com. And you now have a Twitter handle. I noticed, Oh yes, of course, and it's and it's

the same same at A Gary Shilling. Fantastic. Well, thank you for spending so much time with us today. You've been listening to Masters in Business. If you enjoy this conversation, look up an Inch or down an Inch on iTunes and you'll see the other sixty or so podcast we've had. Let me make sure to say thank you to my head of research, Mike pat Nick and my producer Charlie Volmer. Be sure and check out all the rest of our

other interviews. I'm Barry Ritults. You've been listening to Masters in Business on Bloomberg Radio.