WEBVTT - An Interview With Gary Shilling: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.280 --> 0:00:11.680 So I have a funny story about my guest this week. UM, 0:00:11.760 --> 0:00:14.000 you probably know who he is. His name is Gary Shilling. 0:00:14.040 --> 0:00:18.480 He's an economist. He's all over television and and print 0:00:18.520 --> 0:00:24.120 and everything. He's he's his background. He essentially built the 0:00:24.160 --> 0:00:29.520 economics department at Merrill Lynch. He was Meryll's first chief economist. Um. 0:00:29.560 --> 0:00:31.560 And we we get into a few stories about that, 0:00:31.640 --> 0:00:34.640 but I have I have a really amusing story that 0:00:34.680 --> 0:00:40.879 we just didn't get to um in our conversation. So 0:00:41.080 --> 0:00:44.720 I have at various times spoken at different events and 0:00:44.720 --> 0:00:49.320 and this was an event that was down in the Caribbean. Um. 0:00:49.360 --> 0:00:53.280 And they have a lineup of different people, this economist, 0:00:53.400 --> 0:00:57.240 that market strategist, and you sing for your supper. You 0:00:57.240 --> 0:00:59.120 you speak for an hour or two and then you 0:00:59.160 --> 0:01:01.319 get to play the Caribbean for a few days. So 0:01:01.720 --> 0:01:05.440 it's a good deal for everybody. And by coincidence, I'm 0:01:05.480 --> 0:01:10.760 on a catamaran with my wife and Gary Shilling and 0:01:10.800 --> 0:01:13.959 Gary's wife, and uh we're going out to do a 0:01:13.959 --> 0:01:17.600 little diving, a little snorkeling. UM. I want to say 0:01:17.800 --> 0:01:22.120 it was Anguila or Antigua, and I never remember which 0:01:22.240 --> 0:01:24.920 is which, but you know, at a certain point, all 0:01:24.920 --> 0:01:27.800 those islands they're beautiful, that's sunny, the water is gorgeous, 0:01:27.840 --> 0:01:29.840 and it's hard to tell where you are when you're 0:01:29.840 --> 0:01:31.959 on a boat for a week or so. So we 0:01:32.040 --> 0:01:34.720 go out to the dive location and it's a bright 0:01:34.800 --> 0:01:38.559 sunny day and everything is marked underwater. It's twenty feet, 0:01:38.600 --> 0:01:42.720 it's thirty feet. It's crystal clear waters. And I have 0:01:42.760 --> 0:01:45.280 a tendency to to even win snorkeling, to like to 0:01:45.319 --> 0:01:48.440 try and dive deep and and look at stuff. Um 0:01:48.480 --> 0:01:52.240 and so all of a sudden storm comes in out 0:01:52.280 --> 0:01:58.520 of nowhere. We come up from underwater and it's absolute 0:01:58.600 --> 0:02:03.120 from bright blue size guys to totally gray. Can't see anything, 0:02:03.760 --> 0:02:07.040 can't see more than ten ft. The boat, which was 0:02:07.120 --> 0:02:11.240 fifty yards off in that direction, is gone. And I'm 0:02:11.280 --> 0:02:13.960 a pretty good swimmer, and my wife is starting to panic. 0:02:14.520 --> 0:02:17.400 What are we gonna do? We're stuck here, and I'm like, well, 0:02:17.440 --> 0:02:20.079 we have two choices. It's the Carebbean. These storms blew 0:02:20.120 --> 0:02:22.680 in and out in thirty seconds. We could just tread 0:02:22.760 --> 0:02:25.919 water here and let it pass, or I'm pretty sure 0:02:25.960 --> 0:02:28.440 the boat is that way. I have good sense. I 0:02:28.440 --> 0:02:32.280 have a really good sense direction. And I said, um, 0:02:32.360 --> 0:02:34.720 look see where the see where these markings are on 0:02:34.760 --> 0:02:37.960 the floor, and where the entrance to this dive side 0:02:38.040 --> 0:02:41.440 is straight line back that that's where the boat is. 0:02:41.840 --> 0:02:43.800 So we could wait here for five minutes, wait for 0:02:43.800 --> 0:02:45.360 this to pass. We could go back to the boat. 0:02:46.200 --> 0:02:49.119 She goes, take us back to the boat. Okay, So 0:02:49.200 --> 0:02:52.720 she grabs onto my waist ban and I swim back 0:02:52.760 --> 0:02:55.880 to the boat um or at least where I think 0:02:55.880 --> 0:02:59.280 the boat is, and we're swimming for about seven minutes 0:02:59.280 --> 0:03:01.640 and lo and behold, oh look there's the outline of 0:03:01.639 --> 0:03:04.640 a sail. Oh that's the cameraman. There's a boat. And 0:03:04.680 --> 0:03:07.320 of course by the time we get to the camemar Ran, 0:03:07.760 --> 0:03:11.560 the skies are clearing. But meanwhile I assumed it was 0:03:11.639 --> 0:03:14.520 just myself and my wife swimming back to the boat. 0:03:14.760 --> 0:03:17.480 We look back, there's a line of forty people following us, 0:03:17.919 --> 0:03:21.600 including Gary Shilling and his wife. It was a little 0:03:21.639 --> 0:03:24.359 nerve racking for people who either aren't good swimmers or 0:03:24.680 --> 0:03:27.079 tends a panic a little bit. And so we all 0:03:27.120 --> 0:03:29.760 get back on the camemar Ran and all of us 0:03:30.320 --> 0:03:32.400 uh the cat then takes us to a cove with 0:03:32.520 --> 0:03:35.120 the water is three ft deep, and we all get 0:03:35.320 --> 0:03:38.320 ripped roaring lye drunk and spent a few hours stumbling 0:03:38.320 --> 0:03:41.000 along the beach. So that was the first time I 0:03:41.080 --> 0:03:44.840 spent any time with h Gary Shilling. We've since remained 0:03:44.880 --> 0:03:48.040 friendly and UM, I've always enjoyed him and his wife. 0:03:48.080 --> 0:03:52.240 They're they're fascinating, lovely people and every year he sends 0:03:52.560 --> 0:03:55.400 a batch of honey uh to friends and family that 0:03:56.040 --> 0:03:59.360 he raises himself. We spent a lot of time talking 0:03:59.400 --> 0:04:04.400 about beak keeping, which is pretty hilarious conversation. Um, without 0:04:04.400 --> 0:04:08.680 further ado, here is my chat with economist Gary Shilling. 0:04:12.000 --> 0:04:16.320 This is Master's in Business with Barry Ridholds on Bloomberg Radio. 0:04:16.839 --> 0:04:19.760 This week on Masters in Business on Bloomberg Radio, my 0:04:19.839 --> 0:04:25.120 special guest is Gary Shilling, an economist and proprietor of 0:04:25.240 --> 0:04:30.200 the a Gary Shilling Newsletter and Economic Forecast. A little 0:04:30.240 --> 0:04:33.839 background about Gary got a degree in physics cum Laudy 0:04:33.960 --> 0:04:38.080 Magnicum Loudy from Amherst College before getting a master's and 0:04:38.160 --> 0:04:43.120 a pH d in economics at Stanford. Ended up on 0:04:43.160 --> 0:04:46.680 the research staff of the Federal Reserve Bank of San Francisco, 0:04:47.279 --> 0:04:51.360 before going on to set up the economics department at 0:04:51.360 --> 0:04:54.720 a little shop called Merrill Lynch, where he served as 0:04:54.760 --> 0:04:59.680 the firm's first chief economist. Wow, that's an amazing h 0:05:00.200 --> 0:05:03.279 piece of history. Author of the book The Age of 0:05:03.360 --> 0:05:07.360 the Leveraging twice ranked as Wall Street's top economist according 0:05:07.400 --> 0:05:13.320 to Institutional Investor, and a legendary beekeeper, Gary, Welcome to Bloomberg. 0:05:13.760 --> 0:05:16.320 Very glad to be with you. So Gary and I 0:05:16.400 --> 0:05:19.200 know each other for quite a few years. We'll we'll 0:05:19.200 --> 0:05:22.880 talk about some of our adventures together. But let's start 0:05:22.920 --> 0:05:27.440 with the beginning. So physics, right, and I keep talking 0:05:27.480 --> 0:05:30.640 to people on Wall Street with a physics background. How 0:05:30.680 --> 0:05:35.200 do you go from physics? Would from that to both 0:05:35.200 --> 0:05:39.000 a master's and a doctor in an economics at Stanford? Well, 0:05:39.560 --> 0:05:44.240 I like the discipline of physical sciences, and uh, there 0:05:44.360 --> 0:05:49.400 is a there is a yearning for closure own things. 0:05:49.440 --> 0:05:52.919 You you want to fit things together. It isn't just 0:05:53.080 --> 0:05:55.599 kind of a flash here, a flash there. You want 0:05:55.640 --> 0:05:59.240 to see how things come out in terms of a 0:05:59.279 --> 0:06:02.040 total and take some variables, put them into a formula. 0:06:02.120 --> 0:06:06.600 And it's that's a little oversimplified, but but the whole 0:06:06.600 --> 0:06:10.640 idea is that there is a there's a discipline to 0:06:11.040 --> 0:06:18.360 any any uh natural science, physics, chemistry, math, all these things. Uh, 0:06:18.640 --> 0:06:21.279 they don't have quite the fuzziness that economics has. Now 0:06:21.600 --> 0:06:24.840 you get into economics, and you know, economic forecasting is 0:06:24.880 --> 0:06:27.960 an art, it's not a science. But that discipline, I 0:06:28.279 --> 0:06:30.720 think it's important because it kind of keeps you on 0:06:30.800 --> 0:06:33.960 this straight and narrow But anyway, I started off there 0:06:34.040 --> 0:06:37.120 and then my senior year I had an attack of 0:06:37.200 --> 0:06:39.279 common sense and decided I wasn't cut out to be 0:06:39.320 --> 0:06:42.719 a research physicist. So I had a similar epiphany in 0:06:42.760 --> 0:06:46.599 my senior years, and so I decided to move on. 0:06:46.680 --> 0:06:49.359 And uh, you know, it's one of these one of 0:06:49.400 --> 0:06:53.240 these great developments where um, I was thinking about going 0:06:53.240 --> 0:06:55.960 to graduate school in economics, and I talked to amateurs 0:06:56.000 --> 0:06:58.640 as a small school about a thousand students at the time, 0:06:58.640 --> 0:07:01.680 and talked to the president of the college, and he 0:07:01.800 --> 0:07:04.080 suggested business school and a couple of other people, and 0:07:04.120 --> 0:07:06.520 I talked to the head of the economics department. And 0:07:06.640 --> 0:07:09.120 I had happened to have when I had an elementary 0:07:09.120 --> 0:07:12.440 economics course and the sections were taught not by graduate 0:07:12.480 --> 0:07:15.320 students because there were none, but by the faculty and 0:07:15.320 --> 0:07:18.720 and uh we talked about it. He suggested a couple 0:07:18.760 --> 0:07:20.920 of places and then he said, what's your academic record? 0:07:20.960 --> 0:07:22.720 And I told him. He said, oh, you can get 0:07:22.720 --> 0:07:24.440 anywhere you want to go. Where do you want to go? 0:07:24.520 --> 0:07:26.640 And I said, well, I grew up in Ohio, I'm 0:07:26.640 --> 0:07:29.280 here in Massachusetts. I've been an allergic sense birth. I'd 0:07:29.320 --> 0:07:32.320 like to get into a decent climate. And he said, well, 0:07:32.320 --> 0:07:34.120 how about Stanford? And I said the climate was fine, 0:07:34.160 --> 0:07:36.440 how about the how about the economics department always one 0:07:36.440 --> 0:07:38.280 of the top two or three in the country. So 0:07:38.360 --> 0:07:41.640 he called up, set it up. I got a I 0:07:41.720 --> 0:07:45.960 got a teaching assistant ship, a resident assistant ship. I 0:07:46.040 --> 0:07:48.520 never filled out an application. It was one of these 0:07:48.520 --> 0:07:50.960 things where somebody really did something for it for me. 0:07:51.320 --> 0:07:53.000 We all have that going out and went out of 0:07:53.040 --> 0:07:55.400 his way. And well, as I say, the rest of history, 0:07:55.720 --> 0:08:00.160 that's fantastic. So from physics, from physics to Stanford, you 0:08:00.280 --> 0:08:04.720 end up working in standard oil now ex on mobile correct? 0:08:04.760 --> 0:08:06.320 How did that come about? And how did you go 0:08:06.400 --> 0:08:10.840 from there to finance? Well it was interesting at that time. Uh, 0:08:11.040 --> 0:08:14.239 when I came out of Stanford there, Uh, my wife 0:08:14.240 --> 0:08:16.480 and I were would like to have stayed on the 0:08:16.520 --> 0:08:19.040 West Coast. I met her. She was a physiology major 0:08:19.600 --> 0:08:25.000 at Stanford and UH graduate school and uh, but there 0:08:25.000 --> 0:08:27.600 are only three places of PhD economists could work in 0:08:27.640 --> 0:08:31.400 the Bay Area. One was that the San Francisco Fed 0:08:31.480 --> 0:08:33.560 and I spent a summer there and that was a 0:08:33.600 --> 0:08:37.120 pretty laid back place. The second was Bank of America 0:08:37.200 --> 0:08:40.480 when it was Bank of America California, UM the g 0:08:40.640 --> 0:08:46.720 and Needy uh or origination and UH they sponsored my 0:08:46.720 --> 0:08:51.200 my PhD research and that wasn't really quite active enough. 0:08:51.200 --> 0:08:53.520 And the third one was Stanford Research Institute, and they 0:08:53.520 --> 0:08:56.240 didn't pay anything. So I told my wife there are 0:08:56.240 --> 0:08:58.680 two things I'd never never do. One is work in 0:08:58.720 --> 0:09:00.480 New York, and he was kidding to work. Well, that 0:09:00.520 --> 0:09:02.959 was the beginning of a great forecasting career, because I 0:09:03.040 --> 0:09:06.760 took a job as an economist with Standard Alone New 0:09:06.840 --> 0:09:09.479 Jersey now ax On Mobile. As you point out, Berry 0:09:09.600 --> 0:09:12.120 and Uh, well the aggressive story as we lived in 0:09:12.160 --> 0:09:15.120 a New York apartment for two years, moved to the suburbs, 0:09:15.360 --> 0:09:18.000 commuter for twenty five years, but in nine nine I 0:09:18.040 --> 0:09:21.000 moved our shop out to suburban New Jersey. And it's 0:09:21.000 --> 0:09:23.840 a mere coincidence. It's one point four miles from our 0:09:23.840 --> 0:09:26.719 house in Short Hills, New Jersey, just just by coincidence. 0:09:26.720 --> 0:09:29.040 So let's talk a little bit about your time on 0:09:29.160 --> 0:09:33.400 Wall Street. You not only were the first economist chief 0:09:33.400 --> 0:09:37.880 economists from Merrill Lynch, you actually set up their entire economics. Yeah. 0:09:37.920 --> 0:09:41.079 That that's an interesting story because at that point the 0:09:41.120 --> 0:09:45.360 bond houses on Wall Street had economists. Henry Coffin was 0:09:45.400 --> 0:09:49.680 at Solomon Brothers, al Osian Art first Boston, Lynn Santao 0:09:49.800 --> 0:09:53.600 at Aubrey G. Lampson. Uh. But Merrill was known as 0:09:53.280 --> 0:09:56.080 a But I was. I think I was the first 0:09:56.080 --> 0:10:00.480 economist at a stock house Merrill Lynch, And at that 0:10:00.520 --> 0:10:04.959 point economists were relatively new. I can remember Bill Freud, 0:10:05.040 --> 0:10:07.480 who was the economist for New York Stock Exchange, remains 0:10:07.520 --> 0:10:10.240 a good friend. Uh. And he would have what he 0:10:10.320 --> 0:10:13.760 called point Freud's friends. All the economis from Wall Street 0:10:13.800 --> 0:10:16.560 over for monthly lunches at the New York Stock Exchange, 0:10:17.120 --> 0:10:19.880 and we all fit comfortably in one of those wonderful 0:10:19.960 --> 0:10:22.400 ornate rooms. There couldn't have been more than twenty of us. Now, 0:10:22.720 --> 0:10:25.480 how many dozens hundreds of economists are there in the 0:10:25.480 --> 0:10:28.320 Wall Street makes a lot of sense. Perhaps it it 0:10:28.480 --> 0:10:32.200 is part of the reason we obsessed so much on 0:10:32.240 --> 0:10:34.880 the day to day economic data that seems to come out. 0:10:35.200 --> 0:10:39.760 I recall less of an emphasis on that ten twenty 0:10:39.840 --> 0:10:42.840 years ago then we see currently well, and of course 0:10:42.840 --> 0:10:44.880 there's a difference to the data then. I mean, at 0:10:44.920 --> 0:10:47.120 that point every economist would have a couple of researcher 0:10:47.120 --> 0:10:50.120 assist since you get the data by mail, they laboriously 0:10:50.200 --> 0:10:53.200 draw these charts. There were there were, you know, hardly 0:10:53.240 --> 0:10:56.720 any computers. There was no there were no copy machines. 0:10:56.800 --> 0:10:59.200 I mean, it was and of course that made you 0:10:59.240 --> 0:11:01.880 think a lot more. You're listening to Masters in Business 0:11:01.920 --> 0:11:05.559 on Bloomberg Radio. My guest this week is Gary Shilling, 0:11:05.640 --> 0:11:10.319 an economist and essentially physicist who produces his own economic 0:11:10.360 --> 0:11:14.720 research and forecasts. We were discussing earlier that you had 0:11:14.720 --> 0:11:17.480 helped set up the research department of Merrill Lynch and 0:11:17.520 --> 0:11:21.640 you were their chief economist. You also their first chief economists. 0:11:21.720 --> 0:11:24.840 You also have the distinction of being the only person 0:11:24.920 --> 0:11:29.200 to be fired not once, but twice by Donald Reagan 0:11:29.280 --> 0:11:33.040 from Merrill Lynch. Tell us how that came about. I 0:11:33.120 --> 0:11:35.760 went there in nineteen sixty seven and there had not 0:11:35.840 --> 0:11:40.680 been a recession in the US really since nineteen sixty six. One. 0:11:41.320 --> 0:11:45.400 Uh Now, I forecast recession for six seventy, which did occur. 0:11:46.160 --> 0:11:49.280 But it was so different from Merrill Lynch because Mary 0:11:49.360 --> 0:11:52.559 Lynch at that point it was by listed stocks only. 0:11:52.640 --> 0:11:55.200 That was the whole rationale of the firm, and the 0:11:55.240 --> 0:11:58.720 idea of a recession was very upsetting. So Don Reagan, 0:11:58.760 --> 0:12:00.840 who was running the place and I had a difference 0:12:00.840 --> 0:12:05.240 of opinion. Obviously he won. I took my entire staff left, 0:12:05.640 --> 0:12:08.000 ended up at white Well, another Wall Street house with 0:12:08.040 --> 0:12:10.600 no idea. In nineteen seventy eight, Mary Lynch would buy 0:12:10.679 --> 0:12:12.440 why Well. So the story in the street, which is 0:12:12.480 --> 0:12:15.080 literally true, was Chilling is the only guy fired twice 0:12:15.120 --> 0:12:17.760 by Don Reagan. So we come back to you, come 0:12:17.760 --> 0:12:20.520 back to Maryland, they buy white Well. Yea. And how 0:12:20.520 --> 0:12:22.880 does the second firing come about? I mean, now, the 0:12:22.960 --> 0:12:25.520 recessions that was automatic. As a matter of fact, I 0:12:25.559 --> 0:12:28.520 found out later that that when when Reagan, the first 0:12:28.559 --> 0:12:31.400 meeting between Don Reagan and Paul Hallingby was head of 0:12:31.720 --> 0:12:35.040 white Well, that that Reagan said, Uh, if we get together, 0:12:35.120 --> 0:12:37.280 I want I want to know that there's one employee 0:12:37.240 --> 0:12:39.440 of white Weld who will not be invited to join 0:12:39.520 --> 0:12:42.320 the combined firm. So I was out from I was 0:12:42.360 --> 0:12:44.920 out before I got in. So anyway, that was the 0:12:44.960 --> 0:12:47.000 inducement to do what I really had in mind, which 0:12:47.040 --> 0:12:49.880 was set up my own firm, own firm. So before 0:12:49.920 --> 0:12:51.880 we go to that, I want to talk about life 0:12:52.040 --> 0:12:54.959 at a big shop in the late sixties or seventies. 0:12:55.320 --> 0:12:57.880 What was it like as a chief economist at Merrill 0:12:58.000 --> 0:13:01.560 Lynch back in the day. It was it was a 0:13:01.559 --> 0:13:04.400 lot of fun in in in many ways they had 0:13:04.440 --> 0:13:08.679 a very good UH sales staff, particularly the institutional salesman. 0:13:09.200 --> 0:13:13.880 These guys were hungry for input. I was very willing 0:13:13.960 --> 0:13:17.079 to travel all over the world, not only the US, 0:13:17.200 --> 0:13:20.800 but Europe and Japan and UH. And it was it 0:13:20.840 --> 0:13:22.920 was great working for these guys. Of course they were 0:13:23.360 --> 0:13:26.280 they would they would really get their money's worth. I 0:13:26.360 --> 0:13:31.160 remember one one salesman Minneapolis where this guy had scheduled 0:13:31.640 --> 0:13:35.240 meetings with institutions every hour on the hour throughout the day. 0:13:35.800 --> 0:13:39.040 I went to the lunch meeting, UM and I get 0:13:39.080 --> 0:13:41.440 I get my fork ready for the first bite of lunch, 0:13:41.480 --> 0:13:44.079 and he says, well, Gary, tell us about the economy, 0:13:44.240 --> 0:13:47.360 and so the UH, the the entree, comes and goes, 0:13:47.400 --> 0:13:50.240 that goes, comes and goes, and we rushed you out 0:13:50.240 --> 0:13:51.760 there to the next one. And I say, wait a minute, 0:13:51.800 --> 0:13:53.320 I didn't get anything. He said, don't worry. I got 0:13:53.360 --> 0:13:55.000 a sandwich. You can eat it on the elevator on 0:13:55.040 --> 0:13:58.920 the way down. So they kept you hopping as a 0:13:58.920 --> 0:14:04.240 as an adjunct institutional sales. So you leave Merril almost 0:14:04.280 --> 0:14:07.080 the second time and set up your own shop. You 0:14:07.080 --> 0:14:10.200 have your own models and your own forecasting set up 0:14:10.280 --> 0:14:12.880 that you put together. Let's let's talk a little bit 0:14:12.920 --> 0:14:17.000 about the economy and economic indicators and what goes into 0:14:17.080 --> 0:14:20.160 your process. What do you think of the most important 0:14:20.240 --> 0:14:23.440 economic indicators, what do you follow and think has the 0:14:23.480 --> 0:14:25.840 most resonance. Well, let me say this very just just 0:14:25.960 --> 0:14:29.680 going into this that, as I mentioned earlier, forecasting in 0:14:29.720 --> 0:14:31.800 my view as an artist not a science. Now, I 0:14:31.840 --> 0:14:35.680 was trained as as econometrician. When I got to Stanford, 0:14:35.760 --> 0:14:37.320 I had had you know, if you're a physics major, 0:14:37.360 --> 0:14:39.000 you're a math major two whether you want to be 0:14:39.120 --> 0:14:41.800 or not. And I was working there under kenn Arrow, 0:14:41.960 --> 0:14:46.400 Nobel Prize winner econometrician, and and I'd had only one 0:14:46.600 --> 0:14:50.600 undergraduate economics course. So the the math side, the econometric 0:14:50.680 --> 0:14:53.120 side was easy. The economic stuff I had to learn. 0:14:53.760 --> 0:14:56.440 But I have found less and less interest in these 0:14:56.480 --> 0:15:00.480 big models. They simply do not work. They blow up, 0:15:00.520 --> 0:15:06.320 They produced nonsensical. Are they too complex or the You know, 0:15:06.360 --> 0:15:08.560 that's a very good question, and I don't think anybody 0:15:08.560 --> 0:15:12.600 has really ever completely answered that. But but but they 0:15:12.800 --> 0:15:14.560 But the problem is you have to keep going in 0:15:14.640 --> 0:15:17.040 and plugging in and by the time you get all through, 0:15:17.080 --> 0:15:22.480 you and do it from from from scratch. But at 0:15:22.480 --> 0:15:25.240 that time there was this hope that somehow you could 0:15:25.600 --> 0:15:29.080 devise a model of the economy. It would be unsolid 0:15:29.160 --> 0:15:31.880 by human hands. You put in the inputs and outcomes 0:15:31.920 --> 0:15:36.560 the solution and that's all you need to know. So now, forecasting, 0:15:36.560 --> 0:15:39.960 in my view, it's a whole combination of things, and 0:15:40.000 --> 0:15:44.320 it really can't be quantified in any precise way. It's 0:15:44.680 --> 0:15:50.880 certainly looking at various leading indicators. What's the federals, the 0:15:50.960 --> 0:15:54.160 Federal Reserve doing or not doing? Uh, what's the state 0:15:54.160 --> 0:15:57.480 of consumers? Right now? We think we're in this age 0:15:57.480 --> 0:16:00.360 of de leveraging, working off access debt from the eighties 0:16:00.560 --> 0:16:02.960 and nineties, and that you know, I put out this 0:16:02.960 --> 0:16:05.320 book The Age of the leveraging in and I said, 0:16:05.320 --> 0:16:06.720 I thought we were going to have two percent real 0:16:06.800 --> 0:16:09.960 GDP growth, And of course the FED and most people said, 0:16:09.960 --> 0:16:11.760 oh no, it's gonna pick up. Well, where are we 0:16:11.840 --> 0:16:14.440 two point two percent since this recovery started in the 0:16:14.440 --> 0:16:16.880 middle of O nine. But it's it's looking at it's 0:16:16.920 --> 0:16:20.360 looking at history. It's Kentucky winding. It's it's a whole 0:16:20.440 --> 0:16:24.640 most of the Yeah, what is Kentucky wind. That's that's 0:16:24.680 --> 0:16:29.280 that's a that's a Midwestern term for hunches. Okay, Kentucky wind. 0:16:29.760 --> 0:16:32.000 I like that. Well, that's that's when you're shooting. You know, 0:16:32.080 --> 0:16:35.640 those guys were really sharp. They were, so you have 0:16:35.720 --> 0:16:37.960 to you have to know the wind because the wind 0:16:38.000 --> 0:16:40.400 pushes the bullet a little bit. Oh yeah, I left. 0:16:40.720 --> 0:16:42.240 In fact, I talked to a friend of mine who 0:16:42.320 --> 0:16:44.400 was a trained as a sniper, and I called him 0:16:44.440 --> 0:16:46.480 up after I've seen this movie The you know, the 0:16:46.520 --> 0:16:49.560 American Sniper, and I asked him about that and he 0:16:49.600 --> 0:16:51.440 explained that that shot the guy made when he took 0:16:51.440 --> 0:16:54.080 out the bad guy, said that was impossible because the 0:16:54.200 --> 0:16:58.640 sandstorms and with the with the winds going in and 0:16:58.680 --> 0:17:00.800 out of the buildings, it would it would cause the 0:17:00.840 --> 0:17:03.720 bullet to drift. And even even with all the power 0:17:03.720 --> 0:17:07.399 of that fifty caliber, fifty caliber rifle is still going 0:17:07.440 --> 0:17:10.520 to get I have a T shirt I have to 0:17:10.560 --> 0:17:12.800 dig up somewhere. A buddy gave me, who was a 0:17:12.840 --> 0:17:17.560 marine sharpshooter, their logo. Their their tagline was why run, 0:17:17.680 --> 0:17:22.400 You'll only die tired. These guys are serious, serious shooters, 0:17:22.800 --> 0:17:26.120 and they calculate all that stuff, everything from from curvature 0:17:26.119 --> 0:17:28.600 of the earth to wind drift. It's all, it's all 0:17:28.640 --> 0:17:32.080 part of it. So let's hold off discussing the economy 0:17:32.119 --> 0:17:34.959 itself to a later segment. Let's talk a little bit 0:17:34.960 --> 0:17:38.359 about what goes into some of the these models and 0:17:38.400 --> 0:17:40.560 what goes into some of the forecasts. What do you 0:17:40.560 --> 0:17:44.560 look at So you mentioned interest rates, you mentioned consumer spending. 0:17:44.720 --> 0:17:47.760 What other factors do you think are really significant? Well, 0:17:47.760 --> 0:17:50.320 what's what's also very import important is what is the 0:17:50.359 --> 0:17:54.720 consensus saying. Because I in order to in order to 0:17:54.720 --> 0:17:57.720 push back against or to see where they're wrong. Yeah, 0:17:57.760 --> 0:18:00.399 I have two basic principles has always been Eid and me. 0:18:00.560 --> 0:18:05.400 One is that is that human nature changes very slowly 0:18:05.440 --> 0:18:09.040 over time. So people react to summer circumstances in Simmler 0:18:09.040 --> 0:18:11.639 ways and others. History is relevant. Now you still have 0:18:11.680 --> 0:18:14.040 to find the right piece of history. Mark Twain says 0:18:14.119 --> 0:18:16.960 history doesn't repeat, but it rhymes. And the second one 0:18:17.480 --> 0:18:20.600 is that you don't add value by rehashing the cansensus. 0:18:20.840 --> 0:18:25.280 It doesn't mean you are contrarian, and then you bucket consensus. Regardless, 0:18:25.520 --> 0:18:27.960 where we agree, we pass over lightly. But where we 0:18:28.520 --> 0:18:31.960 find something that's important is h is likely to happen 0:18:31.960 --> 0:18:35.080 because you're judged by your forecasting record, Elemanly. And third 0:18:35.160 --> 0:18:37.800 is not yet within the purview of the consensus. That's 0:18:37.800 --> 0:18:40.840 where we really get interested. This week on Masters in Business, 0:18:40.840 --> 0:18:45.720 I'm speaking with economist Gary shilling uh noted author and 0:18:45.920 --> 0:18:49.080 forecaster um and physicists for that matter, as well as 0:18:49.400 --> 0:18:52.919 an economist. Right out of school, you spend some time 0:18:53.080 --> 0:18:56.760 in the San Francisco Federal Reserve Office. What was that 0:18:56.840 --> 0:19:00.240 experience like, Well, it was really at that point point 0:19:00.720 --> 0:19:03.240 deciding that at least at that at that time, it 0:19:03.320 --> 0:19:06.600 was a pretty sleepy operation. So I spent a lot 0:19:06.600 --> 0:19:09.919 of time trying to figure out what indicators led the 0:19:09.920 --> 0:19:14.159 stock market. Well, that was that was a that was 0:19:14.200 --> 0:19:17.120 a stupid exercise because you know, you think about it. 0:19:17.560 --> 0:19:20.480 The stock market tends to lead almost anything else. If 0:19:20.480 --> 0:19:23.400 you could find something that consistently the stock market, hey 0:19:23.440 --> 0:19:27.119 you'd make a fortune. So that was but that was 0:19:27.160 --> 0:19:30.200 a learning experience. That's what happens when you're young and naive. 0:19:30.560 --> 0:19:34.159 So let me ask you a related question. Then, what 0:19:34.160 --> 0:19:37.800 what indicators do people tend to obsess about that really 0:19:37.840 --> 0:19:40.919 don't matter all that Well, it changes over time, but 0:19:41.040 --> 0:19:43.440 right now the FED is is pretty much irrelevant in 0:19:43.720 --> 0:19:46.680 my view. I mean, you're looking at a period where 0:19:47.080 --> 0:19:49.880 where the FED has has pushed out all this money 0:19:49.960 --> 0:19:53.560 quantitative easing, it hasn't done much good. Why is that? Well, 0:19:53.560 --> 0:19:57.680 it's very simple. Uh, Basically, that money got into circulation 0:19:58.200 --> 0:20:02.199 and people use it to high assets stocks. But stocks 0:20:02.200 --> 0:20:05.040 are owned principally by high income people who don't adjust. 0:20:05.040 --> 0:20:07.640 They're spending much in relation to their assets. You've got 0:20:07.640 --> 0:20:09.439 three cars in the driveway, You're not going to put 0:20:09.440 --> 0:20:12.040 a fourth one in there. So it never got beyond that, 0:20:12.080 --> 0:20:15.480 and it didn't do much to help the basic economy. 0:20:15.520 --> 0:20:18.560 It's the pushing on a string, the change in liquidity trap. 0:20:18.640 --> 0:20:21.240 You can use all the technical terms, but basically the 0:20:21.280 --> 0:20:23.800 FED IS in my view is it is pretty much irrelevant. 0:20:24.200 --> 0:20:27.800 And also, of course in this slow growth period um 0:20:27.880 --> 0:20:30.000 the FED keeps pushing off the day that they're going 0:20:30.000 --> 0:20:32.399 to raise rates. They're now a lot more concerned with 0:20:32.440 --> 0:20:35.800 the rest of the world. Their charter is is strictly domestic, 0:20:35.880 --> 0:20:39.640 full employment and price stability, but they obviously now are 0:20:39.680 --> 0:20:42.000 expanding that because the rest of the world is it 0:20:42.080 --> 0:20:44.440 is a global economy. But I think all in all, 0:20:44.520 --> 0:20:46.880 the fet is is pretty impetent right now. It doesn't 0:20:46.880 --> 0:20:49.040 make much difference what they do. So what has been 0:20:49.080 --> 0:20:51.840 the impact of zero interest rate policy? What's been the 0:20:51.880 --> 0:20:56.160 impact of of QI on the overall economy? The effect 0:20:56.200 --> 0:20:59.480 of QUI on the overall economy has been surprisingly little. 0:20:59.720 --> 0:21:02.840 It has pushed up asset prices, but you haven't gotten 0:21:02.840 --> 0:21:06.080 the modiplier effect. Normally, when the FED gives the banks 0:21:06.080 --> 0:21:08.919 a dollar in reserves by lending and re lending and 0:21:08.920 --> 0:21:11.320 what's called a fractional reserve system, they turn it into 0:21:11.440 --> 0:21:18.080 seventy dollars of M two money seventy this point now 0:21:18.080 --> 0:21:21.560 it's one point four to one, so barely moving, barely moving. 0:21:22.000 --> 0:21:25.320 Uh And so it really hasn't hasn't had much, hasn't 0:21:25.359 --> 0:21:28.360 had much effect. Uh So so the FED, the FED 0:21:28.480 --> 0:21:32.080 is really really I think of pretty much on the sidelines. 0:21:32.640 --> 0:21:35.520 And and the other thing about the quantitative easing is 0:21:35.560 --> 0:21:39.080 that the effects of this lower interest rates is created 0:21:39.080 --> 0:21:42.080 a lot of distortions, a lot of zeal for yield. 0:21:42.400 --> 0:21:46.320 You see the rush into leveraged loans, into emerging market 0:21:46.320 --> 0:21:51.040 debt and equity, into UH, into commodities and hedge funds 0:21:51.080 --> 0:21:54.359 and so on. Pension funds is still UH still cling 0:21:54.400 --> 0:21:56.760 to the idea of eight percent returns on their portfolios. 0:21:56.760 --> 0:21:59.760 They say, we can't get that in conventional stocks and bonds. 0:22:00.000 --> 0:22:01.760 We're gonna get it some way. So they move out 0:22:01.800 --> 0:22:03.080 on the risk curve, and I think a lot of 0:22:03.119 --> 0:22:04.959 them moved a lot further out on the risker than 0:22:05.000 --> 0:22:07.440 they realized. I still don't understand where this a percent 0:22:07.600 --> 0:22:10.239