We're bringing together some of the brightest
minds in finance and economics to answer
questions about the state of the economy and the
path forward. Everything from unemployment to the
stock market to debt to longer term economic
inequality. In this episode, we're speaking with
Gary Shilling. He's a financial and economic
adviser who has a track record predicting
recessions. What do you see as the path forward
for the economy right now?
I think what we're looking at here is a is really
an L. It's declining.
It's not the V. It's not a recovery in the second
half. It's a continuing on down into
2021. And thereafter, probably a relatively slow
recovery. What are some of the factors that will
affect that shape of the recovery so the L shape
that you're referring to.
I've gota list of about ten of them.
But I think we're going to see a lot more people
doing what we're doing, working from home.
You know, they're getting used to commuting is
not that much fun.
I think we're going to see a change in consumer
spending habits.
People are going to be a lot more cautious in
terms of their spending as a go ahead.
I think we're going to see downward pressure on
prices and that works the advances of Treasury
bonds, which have been my favorite since 1981
when I said we're entering a Bonbright lifetime.
And by the way, since then, long term Treasury
bonds have outperformed the S&P by six times, six
times. And I think we have even lower rates
because of the safe haven effect and possible
deflation. So it sounds like you see a lot of
real structural changes resulting from this
pandemic, not just short term changes.
These are big picture, long term changes in how
we spend our money or how businesses operate or
how governments operate.
Absolutely. I think that's where we are.
Let's say you look at this versus the subprime
mortgage collapse.
Now, that was the deepest since the depression of
the 1930s. But it only affected directly a
relatively few people.
Now it spread throughout the economy.
It was only those people who were speculating in
housing who really got nailed.
This one affects everybody.
I mean, we're all basically combined.
I mean, you're not in your office.
So I'm not in my office.
Very few people are.
The opening up is slower.
The obviously the politicians want to open up
quickly to get the economy back on track.
That's true of governors as true as president.
What the populace is sitting there and say, hey,
why should I risk why should I risk a COVID 19
and possible death?
So it is extremely disrupted.
I want to touch a little bit more.
You mentioned deflation and some people have said
all of this money printing that we're seeing, all
of this stimulus could, in fact, finally cause
inflation. But sounds like you think the forces
are in the opposite direction.
The only way I think you could get inflation is if
we seal off the borders, if you basically
prevented imports because we are in a global
world. And as long as you have imports and excess
capacity abroad, that's deflationary and but if
you were to seal the borders and literally cut off
any imports and then embark on this huge monetary
and fiscal stimulus. Yeah.
They could they could create inflation.
Well, I don't think we're going to go to that
extreme. Is there a chance of us moving toward an
economy where all of the supply chains are based
in the US, where we don't have any imports and
where we really try to eliminate that global
trade? No, I don't think that's likely.
But we are we are probably going to see it move
to safer areas.
Mexico, I think will be a big beneficiary of
this. And it will it will affect the US.
But bear in mind, the supply chains exist
globally because they're efficient.
I mean, when you look at the situation, why would
somebody put together computer chips in South
Korea, then ship them to Taiwan for semi
assembly, and finally, they're trying to put into
iPhones and what have you?
They do that not because they want to ship goods
around the world, but because it's cheapest, is
the most efficient. So you're breaking that, but
they want to reestablish them and take advantage
of cheap labor in Mexico.
I think it's gonna be a big beneficiary, but
they're probably going to be blowbacks
particularly from China.
And you know, that that's that's really been
atrophying anyway with Trump's trade war with
China. Do you see certain sectors of the economy
benefiting and winning over the next couple of
years more than others?
Are there areas where you are more bullish or
less bullish? I think telecommunications, the
telecommunications capability is there.
We just haven't used it adequately.
And I think we'll utilize it much more intently in
the future. We're probably going to see more
online, online shopping.
And that's that's not good for malls.
But I do think it means that, you know, delivery
services and so on are going to be strong.
Do you think that there will be more stimulus?
And what what would the ideal kind of stimulus
look like from your point of view, if there is
more? There probably is going to be additional of
small businesses definitely in trouble.
There probably will be will be more money there
if they provide more money simply for people to
stay home. That's possible.
I don't think that would be a very good idea
because it encourages people not to work.
They lose their skills.
And you've actually had in the entire post-war
period the participation rate, the percentage of
of males or working age that are either working
or looking for work that's been declining.
And for women, it's been declining since about
2000. Sure, you have these downward trends
anyway. And these things are accentuated so that
maybe more there. But I would not advocated.
Should we be worried about the massive debt
levels from the government side?
The facts are that deficits have not really
mattered because you have so much liquidity in
the world, so much supply.
You remember after the Great Recession, there was
a conviction that all the fiscal and monetary
stimuli were going to result in huge inflation.
As a matter of fact, a number of investors,
including some very famous hedge funds, went to
gold. But what happened?
Big deficits. But inflation has come down.
Is there an argument just to forgive debt
altogether. So, for example, like student loan
debt or other types of household debt, is there a
reason to just kind of say, let's forget it.
Let's have a debt crematorium?
If you're somebody with a big student loan,
you're probably think that's a great idea.
I don't advocate it.
I think people have to be responsible for the
decisions when people incur debts.
If there is no responsibility for repaying them,
they obviously are in trouble.
But one of the things are if we do have
deflation, the problem gets even worse because in
deflation, people's ability to generate income
and so on, in nominal dollars declines.
But debts don't decline.
They're fixed. And so they get harder to service.
That's one of the reasons that the Fed is so
afraid of deflation.
So are you still buying bonds now or where do you
stand? I'm I'm I'm still you know, I've been I
been an advocate of bonds for 39 years and I
still think they're great buying.
One of the interesting things are if you look
back at what has happened since the first of the
year, the bond market started to rally literally
the first trading day of the year.
And that was an indicator that we've got big
problems. Now, the virus was hardly known at that
point. Stocks did not peak until February 19th.
And, you know, some of us believe that bond
markets are smarter than stock markets.
Well, I think that's the case.
And so I think this I think this is where we are
right now. Now, of course, we've had this rally
in stocks, but I think we're in a situation very
much like 1929 in the early thirties.
You had a you had a 600 percent rise in the
Dow Jones Industrial Average in the 1920s, the
roaring 20s. And then between September and
November of twenty nine, stocks fell 48 percent.
The Dow Jones, well, everybody said, well, that's
just not going to fluff off from the 20s.
And so it's all over and great days ahead.
And so you had a rally of 48 percent.
It actually required 52 percent of the decline.
And that and that lasted into July of 1930.
But then as the depression unfolded, stocks really
went into a skid and they they all really fell 89
percent from their peak. I think that's a very
relevant to where we are today.
We saw the initial concern about the crisis.
You know, stocks fell 30 and the S&P fell 34
percent after that peak in February 19th.
And then people said Oh it's coming under control
or we'll be able reopen the economy is really
going to be V-recovery.
And I think that's what we've had up until at
least until right now.
But I think you've got a second leg down.
And that's very much reminiscent of what happened
in the 30s, where we people appreciate the depths
of this recession and the disruption and how long
it's going to take to recover.
And that's why I think stocks could decline from
here 30 or 40 percent.
And that may be optimistic.
Wow. 30 or 40 percent from where the levels they
are in May here.
And that's over the next maybe couple months or a
year, or. It could be a year.
Ya know stocks using anticipate.
And if the recession runs into let's say it runs
into the middle of next year, you wouldn't expect
stocks to bottom until the end of this year or
early next year. They usually anticipate three to
six months. What's the difference in stocks
versus the economy? Are stocks ahead of the
outlook here, and how are they so different from
what's happening? I think stocks are very much
like that. That rebound in 1929, where
there is absolute conviction that the virus will
be under control and that massive monetary and
fiscal stimuli will reinvigorate the economy.
It'll be a V. We'll have strong rebound in the
second half and by a year from now, it'll just be
a distant, faded memory.
That's what I think is going on.
But for my money, as
investors begin to realize that this is a long,
deep, drawn out recession, then we'll start to
see the effects.
And that may take a couple of more months before
you see that. I mean, right now, the second
quarter is pretty much a write off.
But if it's clear that clearly the third quarter
isn't going to be any big improvement, that might
be the time when stocks really resume the big
slide.