Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: So I have a funny story about my guest this week. UM,
Speaker 1: you probably know who he is. His name is Gary Shilling.
Speaker 1: He's an economist. He's all over television and and print
Speaker 1: and everything. He's he's his background. He essentially built the
Speaker 1: economics department at Merrill Lynch. He was Meryll's first chief economist. Um.
Speaker 1: And we we get into a few stories about that,
Speaker 1: but I have I have a really amusing story that
Speaker 1: we just didn't get to um in our conversation. So
Speaker 1: I have at various times spoken at different events and
Speaker 1: and this was an event that was down in the Caribbean. Um.
Speaker 1: And they have a lineup of different people, this economist,
Speaker 1: that market strategist, and you sing for your supper. You
Speaker 1: you speak for an hour or two and then you
Speaker 1: get to play the Caribbean for a few days. So
Speaker 1: it's a good deal for everybody. And by coincidence, I'm
Speaker 1: on a catamaran with my wife and Gary Shilling and
Speaker 1: Gary's wife, and uh we're going out to do a
Speaker 1: little diving, a little snorkeling. UM. I want to say
Speaker 1: it was Anguila or Antigua, and I never remember which
Speaker 1: is which, but you know, at a certain point, all
Speaker 1: those islands they're beautiful, that's sunny, the water is gorgeous,
Speaker 1: and it's hard to tell where you are when you're
Speaker 1: on a boat for a week or so. So we
Speaker 1: go out to the dive location and it's a bright
Speaker 1: sunny day and everything is marked underwater. It's twenty feet,
Speaker 1: it's thirty feet. It's crystal clear waters. And I have
Speaker 1: a tendency to to even win snorkeling, to like to
Speaker 1: try and dive deep and and look at stuff. Um
Speaker 1: and so all of a sudden storm comes in out
Speaker 1: of nowhere. We come up from underwater and it's absolute
Speaker 1: from bright blue size guys to totally gray. Can't see anything,
Speaker 1: can't see more than ten ft. The boat, which was
Speaker 1: fifty yards off in that direction, is gone. And I'm
Speaker 1: a pretty good swimmer, and my wife is starting to panic.
Speaker 1: What are we gonna do? We're stuck here, and I'm like, well,
Speaker 1: we have two choices. It's the Carebbean. These storms blew
Speaker 1: in and out in thirty seconds. We could just tread
Speaker 1: water here and let it pass, or I'm pretty sure
Speaker 1: the boat is that way. I have good sense. I
Speaker 1: have a really good sense direction. And I said, um,
Speaker 1: look see where the see where these markings are on
Speaker 1: the floor, and where the entrance to this dive side
Speaker 1: is straight line back that that's where the boat is.
Speaker 1: So we could wait here for five minutes, wait for
Speaker 1: this to pass. We could go back to the boat.
Speaker 1: She goes, take us back to the boat. Okay, So
Speaker 1: she grabs onto my waist ban and I swim back
Speaker 1: to the boat um or at least where I think
Speaker 1: the boat is, and we're swimming for about seven minutes
Speaker 1: and lo and behold, oh look there's the outline of
Speaker 1: a sail. Oh that's the cameraman. There's a boat. And
Speaker 1: of course by the time we get to the camemar Ran,
Speaker 1: the skies are clearing. But meanwhile I assumed it was
Speaker 1: just myself and my wife swimming back to the boat.
Speaker 1: We look back, there's a line of forty people following us,
Speaker 1: including Gary Shilling and his wife. It was a little
Speaker 1: nerve racking for people who either aren't good swimmers or
Speaker 1: tends a panic a little bit. And so we all
Speaker 1: get back on the camemar Ran and all of us
Speaker 1: uh the cat then takes us to a cove with
Speaker 1: the water is three ft deep, and we all get
Speaker 1: ripped roaring lye drunk and spent a few hours stumbling
Speaker 1: along the beach. So that was the first time I
Speaker 1: spent any time with h Gary Shilling. We've since remained
Speaker 1: friendly and UM, I've always enjoyed him and his wife.
Speaker 1: They're they're fascinating, lovely people and every year he sends
Speaker 1: a batch of honey uh to friends and family that
Speaker 1: he raises himself. We spent a lot of time talking
Speaker 1: about beak keeping, which is pretty hilarious conversation. Um, without
Speaker 1: further ado, here is my chat with economist Gary Shilling.
Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: This week on Masters in Business on Bloomberg Radio, my
Speaker 1: special guest is Gary Shilling, an economist and proprietor of
Speaker 1: the a Gary Shilling Newsletter and Economic Forecast. A little
Speaker 1: background about Gary got a degree in physics cum Laudy
Speaker 1: Magnicum Loudy from Amherst College before getting a master's and
Speaker 1: a pH d in economics at Stanford. Ended up on
Speaker 1: the research staff of the Federal Reserve Bank of San Francisco,
Speaker 1: before going on to set up the economics department at
Speaker 1: a little shop called Merrill Lynch, where he served as
Speaker 1: the firm's first chief economist. Wow, that's an amazing h
Speaker 1: piece of history. Author of the book The Age of
Speaker 1: the Leveraging twice ranked as Wall Street's top economist according
Speaker 1: to Institutional Investor, and a legendary beekeeper, Gary, Welcome to Bloomberg.
Speaker 1: Very glad to be with you. So Gary and I
Speaker 1: know each other for quite a few years. We'll we'll
Speaker 1: talk about some of our adventures together. But let's start
Speaker 1: with the beginning. So physics, right, and I keep talking
Speaker 1: to people on Wall Street with a physics background. How
Speaker 1: do you go from physics? Would from that to both
Speaker 1: a master's and a doctor in an economics at Stanford? Well,
Speaker 1: I like the discipline of physical sciences, and uh, there
Speaker 1: is a there is a yearning for closure own things.
Speaker 1: You you want to fit things together. It isn't just
Speaker 1: kind of a flash here, a flash there. You want
Speaker 1: to see how things come out in terms of a
Speaker 1: total and take some variables, put them into a formula.
Speaker 1: And it's that's a little oversimplified, but but the whole
Speaker 1: idea is that there is a there's a discipline to
Speaker 1: any any uh natural science, physics, chemistry, math, all these things. Uh,
Speaker 1: they don't have quite the fuzziness that economics has. Now
Speaker 1: you get into economics, and you know, economic forecasting is
Speaker 1: an art, it's not a science. But that discipline, I
Speaker 1: think it's important because it kind of keeps you on
Speaker 1: this straight and narrow But anyway, I started off there
Speaker 1: and then my senior year I had an attack of
Speaker 1: common sense and decided I wasn't cut out to be
Speaker 1: a research physicist. So I had a similar epiphany in
Speaker 1: my senior years, and so I decided to move on.
Speaker 1: And uh, you know, it's one of these one of
Speaker 1: these great developments where um, I was thinking about going
Speaker 1: to graduate school in economics, and I talked to amateurs
Speaker 1: as a small school about a thousand students at the time,
Speaker 1: and talked to the president of the college, and he
Speaker 1: suggested business school and a couple of other people, and
Speaker 1: I talked to the head of the economics department. And
Speaker 1: I had happened to have when I had an elementary
Speaker 1: economics course and the sections were taught not by graduate
Speaker 1: students because there were none, but by the faculty and
Speaker 1: and uh we talked about it. He suggested a couple
Speaker 1: of places and then he said, what's your academic record?
Speaker 1: And I told him. He said, oh, you can get
Speaker 1: anywhere you want to go. Where do you want to go?
Speaker 1: And I said, well, I grew up in Ohio, I'm
Speaker 1: here in Massachusetts. I've been an allergic sense birth. I'd
Speaker 1: like to get into a decent climate. And he said, well,
Speaker 1: how about Stanford? And I said the climate was fine,
Speaker 1: how about the how about the economics department always one
Speaker 1: of the top two or three in the country. So
Speaker 1: he called up, set it up. I got a I
Speaker 1: got a teaching assistant ship, a resident assistant ship. I
Speaker 1: never filled out an application. It was one of these
Speaker 1: things where somebody really did something for it for me.
Speaker 1: We all have that going out and went out of
Speaker 1: his way. And well, as I say, the rest of history,
Speaker 1: that's fantastic. So from physics, from physics to Stanford, you
Speaker 1: end up working in standard oil now ex on mobile correct?
Speaker 1: How did that come about? And how did you go
Speaker 1: from there to finance? Well it was interesting at that time. Uh,
Speaker 1: when I came out of Stanford there, Uh, my wife
Speaker 1: and I were would like to have stayed on the
Speaker 1: West Coast. I met her. She was a physiology major
Speaker 1: at Stanford and UH graduate school and uh, but there
Speaker 1: are only three places of PhD economists could work in
Speaker 1: the Bay Area. One was that the San Francisco Fed
Speaker 1: and I spent a summer there and that was a
Speaker 1: pretty laid back place. The second was Bank of America
Speaker 1: when it was Bank of America California, UM the g
Speaker 1: and Needy uh or origination and UH they sponsored my
Speaker 1: my PhD research and that wasn't really quite active enough.
Speaker 1: And the third one was Stanford Research Institute, and they
Speaker 1: didn't pay anything. So I told my wife there are
Speaker 1: two things I'd never never do. One is work in
Speaker 1: New York, and he was kidding to work. Well, that
Speaker 1: was the beginning of a great forecasting career, because I
Speaker 1: took a job as an economist with Standard Alone New
Speaker 1: Jersey now ax On Mobile. As you point out, Berry
Speaker 1: and Uh, well the aggressive story as we lived in
Speaker 1: a New York apartment for two years, moved to the suburbs,
Speaker 1: commuter for twenty five years, but in nine nine I
Speaker 1: moved our shop out to suburban New Jersey. And it's
Speaker 1: a mere coincidence. It's one point four miles from our
Speaker 1: house in Short Hills, New Jersey, just just by coincidence.
Speaker 1: So let's talk a little bit about your time on
Speaker 1: Wall Street. You not only were the first economist chief
Speaker 1: economists from Merrill Lynch, you actually set up their entire economics. Yeah.
Speaker 1: That that's an interesting story because at that point the
Speaker 1: bond houses on Wall Street had economists. Henry Coffin was
Speaker 1: at Solomon Brothers, al Osian Art first Boston, Lynn Santao
Speaker 1: at Aubrey G. Lampson. Uh. But Merrill was known as
Speaker 1: a But I was. I think I was the first
Speaker 1: economist at a stock house Merrill Lynch, And at that
Speaker 1: point economists were relatively new. I can remember Bill Freud,
Speaker 1: who was the economist for New York Stock Exchange, remains
Speaker 1: a good friend. Uh. And he would have what he
Speaker 1: called point Freud's friends. All the economis from Wall Street
Speaker 1: over for monthly lunches at the New York Stock Exchange,
Speaker 1: and we all fit comfortably in one of those wonderful
Speaker 1: ornate rooms. There couldn't have been more than twenty of us. Now,
Speaker 1: how many dozens hundreds of economists are there in the
Speaker 1: Wall Street makes a lot of sense. Perhaps it it
Speaker 1: is part of the reason we obsessed so much on
Speaker 1: the day to day economic data that seems to come out.
Speaker 1: I recall less of an emphasis on that ten twenty
Speaker 1: years ago then we see currently well, and of course
Speaker 1: there's a difference to the data then. I mean, at
Speaker 1: that point every economist would have a couple of researcher
Speaker 1: assist since you get the data by mail, they laboriously
Speaker 1: draw these charts. There were there were, you know, hardly
Speaker 1: any computers. There was no there were no copy machines.
Speaker 1: I mean, it was and of course that made you
Speaker 1: think a lot more. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My guest this week is Gary Shilling,
Speaker 1: an economist and essentially physicist who produces his own economic
Speaker 1: research and forecasts. We were discussing earlier that you had
Speaker 1: helped set up the research department of Merrill Lynch and
Speaker 1: you were their chief economist. You also their first chief economists.
Speaker 1: You also have the distinction of being the only person
Speaker 1: to be fired not once, but twice by Donald Reagan
Speaker 1: from Merrill Lynch. Tell us how that came about. I
Speaker 1: went there in nineteen sixty seven and there had not
Speaker 1: been a recession in the US really since nineteen sixty six. One.
Speaker 1: Uh Now, I forecast recession for six seventy, which did occur.
Speaker 1: But it was so different from Merrill Lynch because Mary
Speaker 1: Lynch at that point it was by listed stocks only.
Speaker 1: That was the whole rationale of the firm, and the
Speaker 1: idea of a recession was very upsetting. So Don Reagan,
Speaker 1: who was running the place and I had a difference
Speaker 1: of opinion. Obviously he won. I took my entire staff left,
Speaker 1: ended up at white Well, another Wall Street house with
Speaker 1: no idea. In nineteen seventy eight, Mary Lynch would buy
Speaker 1: why Well. So the story in the street, which is
Speaker 1: literally true, was Chilling is the only guy fired twice
Speaker 1: by Don Reagan. So we come back to you, come
Speaker 1: back to Maryland, they buy white Well. Yea. And how
Speaker 1: does the second firing come about? I mean, now, the
Speaker 1: recessions that was automatic. As a matter of fact, I
Speaker 1: found out later that that when when Reagan, the first
Speaker 1: meeting between Don Reagan and Paul Hallingby was head of
Speaker 1: white Well, that that Reagan said, Uh, if we get together,
Speaker 1: I want I want to know that there's one employee
Speaker 1: of white Weld who will not be invited to join
Speaker 1: the combined firm. So I was out from I was
Speaker 1: out before I got in. So anyway, that was the
Speaker 1: inducement to do what I really had in mind, which
Speaker 1: was set up my own firm, own firm. So before
Speaker 1: we go to that, I want to talk about life
Speaker 1: at a big shop in the late sixties or seventies.
Speaker 1: What was it like as a chief economist at Merrill
Speaker 1: Lynch back in the day. It was it was a
Speaker 1: lot of fun in in in many ways they had
Speaker 1: a very good UH sales staff, particularly the institutional salesman.
Speaker 1: These guys were hungry for input. I was very willing
Speaker 1: to travel all over the world, not only the US,
Speaker 1: but Europe and Japan and UH. And it was it
Speaker 1: was great working for these guys. Of course they were
Speaker 1: they would they would really get their money's worth. I
Speaker 1: remember one one salesman Minneapolis where this guy had scheduled
Speaker 1: meetings with institutions every hour on the hour throughout the day.
Speaker 1: I went to the lunch meeting, UM and I get
Speaker 1: I get my fork ready for the first bite of lunch,
Speaker 1: and he says, well, Gary, tell us about the economy,
Speaker 1: and so the UH, the the entree, comes and goes,
Speaker 1: that goes, comes and goes, and we rushed you out
Speaker 1: there to the next one. And I say, wait a minute,
Speaker 1: I didn't get anything. He said, don't worry. I got
Speaker 1: a sandwich. You can eat it on the elevator on
Speaker 1: the way down. So they kept you hopping as a
Speaker 1: as an adjunct institutional sales. So you leave Merril almost
Speaker 1: the second time and set up your own shop. You
Speaker 1: have your own models and your own forecasting set up
Speaker 1: that you put together. Let's let's talk a little bit
Speaker 1: about the economy and economic indicators and what goes into
Speaker 1: your process. What do you think of the most important
Speaker 1: economic indicators, what do you follow and think has the
Speaker 1: most resonance. Well, let me say this very just just
Speaker 1: going into this that, as I mentioned earlier, forecasting in
Speaker 1: my view as an artist not a science. Now, I
Speaker 1: was trained as as econometrician. When I got to Stanford,
Speaker 1: I had had you know, if you're a physics major,
Speaker 1: you're a math major two whether you want to be
Speaker 1: or not. And I was working there under kenn Arrow,
Speaker 1: Nobel Prize winner econometrician, and and I'd had only one
Speaker 1: undergraduate economics course. So the the math side, the econometric
Speaker 1: side was easy. The economic stuff I had to learn.
Speaker 1: But I have found less and less interest in these
Speaker 1: big models. They simply do not work. They blow up,
Speaker 1: They produced nonsensical. Are they too complex or the You know,
Speaker 1: that's a very good question, and I don't think anybody
Speaker 1: has really ever completely answered that. But but but they
Speaker 1: But the problem is you have to keep going in
Speaker 1: and plugging in and by the time you get all through,
Speaker 1: you and do it from from from scratch. But at
Speaker 1: that time there was this hope that somehow you could
Speaker 1: devise a model of the economy. It would be unsolid
Speaker 1: by human hands. You put in the inputs and outcomes
Speaker 1: the solution and that's all you need to know. So now, forecasting,
Speaker 1: in my view, it's a whole combination of things, and
Speaker 1: it really can't be quantified in any precise way. It's
Speaker 1: certainly looking at various leading indicators. What's the federals, the
Speaker 1: Federal Reserve doing or not doing? Uh, what's the state
Speaker 1: of consumers? Right now? We think we're in this age
Speaker 1: of de leveraging, working off access debt from the eighties
Speaker 1: and nineties, and that you know, I put out this
Speaker 1: book The Age of the leveraging in and I said,
Speaker 1: I thought we were going to have two percent real
Speaker 1: GDP growth, And of course the FED and most people said,
Speaker 1: oh no, it's gonna pick up. Well, where are we
Speaker 1: two point two percent since this recovery started in the
Speaker 1: middle of O nine. But it's it's looking at it's
Speaker 1: looking at history. It's Kentucky winding. It's it's a whole
Speaker 1: most of the Yeah, what is Kentucky wind. That's that's
Speaker 1: that's a that's a Midwestern term for hunches. Okay, Kentucky wind.
Speaker 1: I like that. Well, that's that's when you're shooting. You know,
Speaker 1: those guys were really sharp. They were, so you have
Speaker 1: to you have to know the wind because the wind
Speaker 1: pushes the bullet a little bit. Oh yeah, I left.
Speaker 1: In fact, I talked to a friend of mine who
Speaker 1: was a trained as a sniper, and I called him
Speaker 1: up after I've seen this movie The you know, the
Speaker 1: American Sniper, and I asked him about that and he
Speaker 1: explained that that shot the guy made when he took
Speaker 1: out the bad guy, said that was impossible because the
Speaker 1: sandstorms and with the with the winds going in and
Speaker 1: out of the buildings, it would it would cause the
Speaker 1: bullet to drift. And even even with all the power
Speaker 1: of that fifty caliber, fifty caliber rifle is still going
Speaker 1: to get I have a T shirt I have to
Speaker 1: dig up somewhere. A buddy gave me, who was a
Speaker 1: marine sharpshooter, their logo. Their their tagline was why run,
Speaker 1: You'll only die tired. These guys are serious, serious shooters,
Speaker 1: and they calculate all that stuff, everything from from curvature
Speaker 1: of the earth to wind drift. It's all, it's all
Speaker 1: part of it. So let's hold off discussing the economy
Speaker 1: itself to a later segment. Let's talk a little bit
Speaker 1: about what goes into some of the these models and
Speaker 1: what goes into some of the forecasts. What do you
Speaker 1: look at So you mentioned interest rates, you mentioned consumer spending.
Speaker 1: What other factors do you think are really significant? Well,
Speaker 1: what's what's also very import important is what is the
Speaker 1: consensus saying. Because I in order to in order to
Speaker 1: push back against or to see where they're wrong. Yeah,
Speaker 1: I have two basic principles has always been Eid and me.
Speaker 1: One is that is that human nature changes very slowly
Speaker 1: over time. So people react to summer circumstances in Simmler
Speaker 1: ways and others. History is relevant. Now you still have
Speaker 1: to find the right piece of history. Mark Twain says
Speaker 1: history doesn't repeat, but it rhymes. And the second one
Speaker 1: is that you don't add value by rehashing the cansensus.
Speaker 1: It doesn't mean you are contrarian, and then you bucket consensus. Regardless,
Speaker 1: where we agree, we pass over lightly. But where we
Speaker 1: find something that's important is h is likely to happen
Speaker 1: because you're judged by your forecasting record, Elemanly. And third
Speaker 1: is not yet within the purview of the consensus. That's
Speaker 1: where we really get interested. This week on Masters in Business,
Speaker 1: I'm speaking with economist Gary shilling uh noted author and
Speaker 1: forecaster um and physicists for that matter, as well as
Speaker 1: an economist. Right out of school, you spend some time
Speaker 1: in the San Francisco Federal Reserve Office. What was that
Speaker 1: experience like, Well, it was really at that point point
Speaker 1: deciding that at least at that at that time, it
Speaker 1: was a pretty sleepy operation. So I spent a lot
Speaker 1: of time trying to figure out what indicators led the
Speaker 1: stock market. Well, that was that was a that was
Speaker 1: a stupid exercise because you know, you think about it.
Speaker 1: The stock market tends to lead almost anything else. If
Speaker 1: you could find something that consistently the stock market, hey
Speaker 1: you'd make a fortune. So that was but that was
Speaker 1: a learning experience. That's what happens when you're young and naive.
Speaker 1: So let me ask you a related question. Then, what
Speaker 1: what indicators do people tend to obsess about that really
Speaker 1: don't matter all that Well, it changes over time, but
Speaker 1: right now the FED is is pretty much irrelevant in
Speaker 1: my view. I mean, you're looking at a period where
Speaker 1: where the FED has has pushed out all this money
Speaker 1: quantitative easing, it hasn't done much good. Why is that? Well,
Speaker 1: it's very simple. Uh, Basically, that money got into circulation
Speaker 1: and people use it to high assets stocks. But stocks
Speaker 1: are owned principally by high income people who don't adjust.
Speaker 1: They're spending much in relation to their assets. You've got
Speaker 1: three cars in the driveway, You're not going to put
Speaker 1: a fourth one in there. So it never got beyond that,
Speaker 1: and it didn't do much to help the basic economy.
Speaker 1: It's the pushing on a string, the change in liquidity trap.
Speaker 1: You can use all the technical terms, but basically the
Speaker 1: FED IS in my view is it is pretty much irrelevant.
Speaker 1: And also, of course in this slow growth period um
Speaker 1: the FED keeps pushing off the day that they're going
Speaker 1: to raise rates. They're now a lot more concerned with
Speaker 1: the rest of the world. Their charter is is strictly domestic,
Speaker 1: full employment and price stability, but they obviously now are
Speaker 1: expanding that because the rest of the world is it
Speaker 1: is a global economy. But I think all in all,
Speaker 1: the fet is is pretty impetent right now. It doesn't
Speaker 1: make much difference what they do. So what has been
Speaker 1: the impact of zero interest rate policy? What's been the
Speaker 1: impact of of QI on the overall economy? The effect
Speaker 1: of QUI on the overall economy has been surprisingly little.
Speaker 1: It has pushed up asset prices, but you haven't gotten
Speaker 1: the modiplier effect. Normally, when the FED gives the banks
Speaker 1: a dollar in reserves by lending and re lending and
Speaker 1: what's called a fractional reserve system, they turn it into
Speaker 1: seventy dollars of M two money seventy this point now
Speaker 1: it's one point four to one, so barely moving, barely moving.
Speaker 1: Uh And so it really hasn't hasn't had much, hasn't
Speaker 1: had much effect. Uh So so the FED, the FED
Speaker 1: is really really I think of pretty much on the sidelines.
Speaker 1: And and the other thing about the quantitative easing is
Speaker 1: that the effects of this lower interest rates is created
Speaker 1: a lot of distortions, a lot of zeal for yield.
Speaker 1: You see the rush into leveraged loans, into emerging market
Speaker 1: debt and equity, into UH, into commodities and hedge funds
Speaker 1: and so on. Pension funds is still UH still cling
Speaker 1: to the idea of eight percent returns on their portfolios.
Speaker 1: They say, we can't get that in conventional stocks and bonds.
Speaker 1: We're gonna get it some way. So they move out
Speaker 1: on the risk curve, and I think a lot of
Speaker 1: them moved a lot further out on the risker than
Speaker 1: they realized. I still don't understand where this a percent
Speaker 1: number has come from. It seems like they've made that
Speaker 1: number up and that they had to. They want a
Speaker 1: percent look in order to maintain a tax to for
Speaker 1: its status. It's five percent is what you have to
Speaker 1: put out. So I don't know where this number. Two.
Speaker 1: I think maybe very was five percent plus three percent
Speaker 1: per inflation. But but but you don't have inflation, like
Speaker 1: you know, you haven't got any inflation. But of course
Speaker 1: the other thing is if they start lowering that number,
Speaker 1: then they have to lower the other side the discounting
Speaker 1: rate for the future liabilities, the punch and payments to
Speaker 1: bring it back to the to the present value, and
Speaker 1: that greatly increases, you know, the lower the interest rate
Speaker 1: you're discounting with, that greatly expands there the current value
Speaker 1: of those liabilities. So they get hit on both sides.
Speaker 1: So there's a great reluctance to to face the reality,
Speaker 1: to be honest about what they should really be expecting. Correct,
Speaker 1: that's correct, that that's quite fat sinating. So let's talk
Speaker 1: a little bit about what should have been done following
Speaker 1: the financial crisis. What should Congress have done? What should
Speaker 1: the fiddle reserve have done in response to you know,
Speaker 1: the collapse and asset prices and and GDP and jobs. Well,
Speaker 1: bailing out Wall Street probably wasn't necessary, because we very
Speaker 1: well could have had a full blown financial melch. What
Speaker 1: about bailing out the bond holders? When we when we
Speaker 1: talk about these bailouts, a lot of bad bonds were
Speaker 1: paid out right, and I think that that really has
Speaker 1: prolonged the agony. I think they probably went too far
Speaker 1: on this whole and they and they really have way
Speaker 1: overrated themselves in terms of what they can do. Listen,
Speaker 1: look at the look at the whole affection threeon dollar damage.
Speaker 1: It's huge quantitative easing, and what do we get? Two
Speaker 1: percent real GDP growth? I mean, it's telling you that
Speaker 1: these forces of the leveraging are so great they're overpowering this.
Speaker 1: And these guys who constantly think that policy is gonna
Speaker 1: is gonna overwhelm everything else and they're gonna get the
Speaker 1: results they want. I think they're in a dream world.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: guest today is Dr Gary Shilling. He is an economist, researcher, forecaster.
Speaker 1: Let's talk a little bit about the present economy. Where
Speaker 1: are we in the economic cycle. I'm not sure we're
Speaker 1: in a conventional economic cycle, and of course everybody wishes
Speaker 1: wishes we were. Everybody yearns for the idea of of
Speaker 1: a very systematic cycle. And you can see where are you.
Speaker 1: I go out and I see presentations. A lot of
Speaker 1: the big banks have their representatives out and they say, oh,
Speaker 1: here's a circle, and here's where we are in that. Uh.
Speaker 1: I don't think we're in that kind of I don't
Speaker 1: think we're in that kind of world right now. We're
Speaker 1: going through this massive deleveraging or we're seeing slow growth,
Speaker 1: we're seeing commadi prices decline, We're seeing the strengthen the dollar. Uh,
Speaker 1: we're seeing competitive evaluations against the dollar. Uh. There's a
Speaker 1: lot of things going on here that I don't think
Speaker 1: give you a very clear idea of a cycle per se.
Speaker 1: And one thing I think it is, you know, there's
Speaker 1: this yearning for nostalgia. We all have that and and
Speaker 1: forecashers are just as subject to this as anybody else.
Speaker 1: And you always have this feeling, oh boy, if we
Speaker 1: could get back to the days when it was a
Speaker 1: nice cycle and I know that it's four years and
Speaker 1: if pounds, I'd be thrilled to death. Yeah. But you know,
Speaker 1: and equal and people talk about equal, and hey, I've
Speaker 1: been in this business a long time, very and equal.
Speaker 1: Everything was something you simply pass through on the way
Speaker 1: to going to access is on the top of the bottom.
Speaker 1: Don't value you exist at very briefly swing and in retrospect,
Speaker 1: that's right. So along those lines, let me ask you
Speaker 1: a um, let me ask you a related question. I
Speaker 1: know your historian, I know you look at a lot
Speaker 1: of economic data from days gone by. Is there any
Speaker 1: period in history that's comparable to what we're living through now? Um,
Speaker 1: that's a good question at times when you're working off access.
Speaker 1: Is I suppose you could say that to a certain
Speaker 1: extent outs what was going on in the in the
Speaker 1: nineteen thirties, but both Great Depression or even yeah, that
Speaker 1: was a great depression in the aftermath, but there were
Speaker 1: a lot of other things going on. There, a complete
Speaker 1: shifting in policy from basically a lessay fair to too
Speaker 1: much more government involvement in the economy. Whether that helped
Speaker 1: or hurt. You know, historians argue about that. I don't
Speaker 1: think there is a I don't think there is a
Speaker 1: period right now where you can you can point to
Speaker 1: it and say, let's follow the script that does that
Speaker 1: does happen from time to time. And I'm always looking
Speaker 1: for those periods because but this is unique. You're saying,
Speaker 1: I don't see I don't see the relevance of that
Speaker 1: right now. Can you say this is unprecedented? There's nothing well,
Speaker 1: at least, and I think in in the experience of
Speaker 1: modern economic forecasting, it is so um, I know you're
Speaker 1: a big bond bull and have been for a long time.
Speaker 1: Four years thirty four year bullmarket in bonds showing no
Speaker 1: sign of ending. Where are we in this bond? Is
Speaker 1: the bond bull market still alive? Ye? The yield on
Speaker 1: the third year treasure was fifteen point to one percent.
Speaker 1: And I said in writing, we're entering the bond rally
Speaker 1: of a lifetime because I saw inflation unwinding and with
Speaker 1: lower inflation that would push down yields, push up bound prices.
Speaker 1: And and I think we're still in that. I mean
Speaker 1: yields now obviously have dropped a tremendous, tremendous amount there
Speaker 1: more like three little over under three percent for the
Speaker 1: third year bond. I think we're gonna go to two
Speaker 1: percent now, somebody in the year on the three year bond.
Speaker 1: Now somebody says, well, I mean, what's you know, what
Speaker 1: does that do for you? And who would accept three
Speaker 1: percent yield? I couldn't care less what the yield is.
Speaker 1: I never have as long as it's going down, because
Speaker 1: that means the price of the bonds is going on.
Speaker 1: And when you look at the convexity of this whole thing,
Speaker 1: if if I'm right. And you go from essentially three
Speaker 1: percent to two percent on a thirty year uh coupon bond,
Speaker 1: You make thirty percent on your money, which I think
Speaker 1: is going to be a lot better than than whatever
Speaker 1: is in second place, And my mortgage is going to
Speaker 1: drop to two point nine percent. What does that do
Speaker 1: for housing? What does that do for other items purchased
Speaker 1: with debt? Well, of course, the question is under what
Speaker 1: circumstance does that happen? If you're in a very low
Speaker 1: inflationary environment, if you're in a slow growth growth, Yeah,
Speaker 1: if you're in a slow growth environment, and it has
Speaker 1: other characteristics. I mean, you look at housing. You mentioned housing. Housing,
Speaker 1: This recovery has been basically a rental market. It has
Speaker 1: not been new homeowners that normally are the basis of housing.
Speaker 1: They're the people by the starter houses from people that
Speaker 1: then move up the Latin X, run on the ladder
Speaker 1: and on up and in housing not really happening because
Speaker 1: people they don't have the incomes. Uh, they don't have
Speaker 1: the credit scores. Uh they and and of course it's
Speaker 1: become you know, it's it's become a virtue as as
Speaker 1: out of necessity people. Oh, I really don't want to
Speaker 1: house on my own. I don't want to responsibility. I'd
Speaker 1: rather live in a more urban environment. Chicken and egg there,
Speaker 1: Uh you know which way is a causality. But my
Speaker 1: friend Jonathan Miller, who's been the show right well does
Speaker 1: does a lot of interesting appraisal analysis, said that there
Speaker 1: are so many people with either low equity, no equity,
Speaker 1: or negative equity that a huge pool of inventory that's
Speaker 1: normally for sale isn't on the market, and a huge
Speaker 1: pool of potential buyers aren't participating, so you have few
Speaker 1: buyers and even fewer houses. Yeah, and there are a
Speaker 1: lot of people. You know, it's just like stocks, the
Speaker 1: idea they take a beating in a stock and they say,
Speaker 1: I won't sell it till I get out. Even it's
Speaker 1: irrational because the market is whatever the market is today.
Speaker 1: But I think there is that there is that pool
Speaker 1: of of people who owned houses they bought them there underwater,
Speaker 1: and they're basically saying, yeah, I want to shell, but
Speaker 1: I can't get out from under it. And of course
Speaker 1: some people they have you know, they they they're upside down.
Speaker 1: They mortgages worth more than the house. So uh, if
Speaker 1: they sell it, they've got they've got financial problems, to
Speaker 1: say the least. It also depends if you're in a
Speaker 1: recourse or a nonrecourse state, if you can walk away
Speaker 1: or not, or if you can talk your bank into
Speaker 1: renegotiating the total UH amounts under a number of the
Speaker 1: hamp and tamp program, if you could do a short
Speaker 1: sale where you basically sell the market and the lender
Speaker 1: forgives a difference. I mean, they're all kinds of variations.
Speaker 1: So what do you see happening in housing over the
Speaker 1: next couple of years. Well, I think I think housing
Speaker 1: is is probably going to limp along here, but I
Speaker 1: don't see anything really pushing it. I mean, I mean,
Speaker 1: we're the we're the most over housed country in the
Speaker 1: world possible exception maybe Spain. I mean, the National Association
Speaker 1: relators would never tell you that. But well, it's always
Speaker 1: a good time to buy or sell a house according
Speaker 1: to that. Yeah, I remember an ad they had, But
Speaker 1: that's a great time to buy, it's a great time
Speaker 1: to sell that. It's always a great always a great
Speaker 1: time to generate a sales commission. All right, yes, you
Speaker 1: got it, um, So let's talk about energy, because you've
Speaker 1: sent some really interesting things about energy. Oil prices of
Speaker 1: drop cut in half over the past year. I understand
Speaker 1: you talked about twenty dollar a barrel oil. Yeah. Well,
Speaker 1: here's the rationale, uh peck, is their cartel. Cartels exists
Speaker 1: to keep prices above equilibrium. That's the whole purpose that
Speaker 1: encourages cheating. Somebody was more than their share, either in
Speaker 1: the cartel OPEC or outside Russia, American frackers, whoever. So
Speaker 1: the leader of the cartel's responsibilities to cut its own
Speaker 1: production to accommodate the cheaters to avoid a price collapse. Well,
Speaker 1: OPEC has been doing that for years, but they're getting
Speaker 1: tired of it. In the last ten years, OPEC production
Speaker 1: has been flat and all the growth has come in
Speaker 1: non OPEC sources, a lot of recently from American from
Speaker 1: American frackers. So the Saudias and their and their colleagues
Speaker 1: and the Persian Gulf. Back November seven, when we were
Speaker 1: sitting down to our Thanksgiving turkeys, they decided they weren't
Speaker 1: gonna cut They basically said, we're gonna play it. We're
Speaker 1: gonna play in the labory game of chicken. We got
Speaker 1: about five billion dollars in foreign currency reserves and work
Speaker 1: and see, we're gonna see who can take lower prices.
Speaker 1: The longest OPEC production and with thirty thirty million barrels
Speaker 1: a day, they took off, basically took off the quotas.
Speaker 1: It's now thirty one and a half million barrels a day.
Speaker 1: She say, okay, now, how low the prices go before
Speaker 1: somebody chickens out, some major producer says, I've had it,
Speaker 1: I've got to cut back. It isn't the cost of
Speaker 1: meeting budgets that's irrelevant here, Okay, maybe it maybe Venezuela
Speaker 1: is fifty bucks of barrel, that's irrelevant. It isn't even
Speaker 1: the full full cycle cost, in other words, the costs
Speaker 1: of drilling the whole laying the pipes, the overhead. So no, no, no, no.
Speaker 1: When you're a price war, it's the marginal cost. It's
Speaker 1: the cost once the pipes are laid, the oil is
Speaker 1: coming out of the ground. In other words, where is
Speaker 1: your free cash flow disappear? And in the premium basis
Speaker 1: in Texas and in the Persian Gulf, that's in the
Speaker 1: ten to twenty dollar barrel range. So that's how I
Speaker 1: get to that number. So you can actually see oil
Speaker 1: full down to twenty five or so dollars a barrel,
Speaker 1: and they're still making five or more dollars. That's right.
Speaker 1: In other words, they may be losing money on a
Speaker 1: full on the full cost basis, but in terms of
Speaker 1: the marginal cash in other words, you know, they still
Speaker 1: have positive cash flow on a marginal basis, so that
Speaker 1: that's the incentive to keep producing. And now you know
Speaker 1: price goes down, there doesn't stay there forever, but you
Speaker 1: but you're kind to get to the point that you
Speaker 1: have major production that disappears from the system, and we
Speaker 1: haven't seen that. There's still the world a washing oil. Sure,
Speaker 1: oh sure, I mean you know, you're producing about two
Speaker 1: million barrels a day more than demand. Right now, you're
Speaker 1: showing floating around filled with oil and no place to
Speaker 1: drop it off. That's that's quite fascinating. So normally when
Speaker 1: you talk about oil prices dropping from over a hundred
Speaker 1: dollars to dollars, we would be talking about a recession.
Speaker 1: Do you see your recession anytime in the next twelve months.
Speaker 1: I don't see the making of a recession. Uh. You
Speaker 1: have recession, said, at least historically for two reasons. One
Speaker 1: is the FED raisers interest rates to choke off what
Speaker 1: they see is an overheating economy. Now, they may have
Speaker 1: painted themselves into a corner here. They've been yelling and
Speaker 1: screaming about raising rates. They've cry wolf an awful lot
Speaker 1: their credibilities at sake. They may raise rage simply to
Speaker 1: preserve credibility. But the kind of interest rate like they
Speaker 1: did in ninety four, where the where they want three
Speaker 1: inter basis points on on FED funds in six months
Speaker 1: or so, I don't see that. So the other possibility
Speaker 1: recession is a is some kind of a shock. That's
Speaker 1: what we had with the collapse in dot com stocks
Speaker 1: in the late nineties. That was a housing uh in
Speaker 1: in the in the mid two thousands, maybe China. So
Speaker 1: in the last minute we have you you reading my mind.
Speaker 1: What's the potential impact of China on the global economy. Well,
Speaker 1: the reality of China is that it's nothing has really
Speaker 1: changed their accept perceptions. China basically is not a leader.
Speaker 1: It's not a self lead comp country. China imports raw
Speaker 1: materials and equipment and use it to manufacture goods that
Speaker 1: they send to North America and Europe. So their activity follows.
Speaker 1: That's where they are depending on that. Of course they
Speaker 1: have infrastructure spending as well. But but the point is
Speaker 1: that it's the perception of China. With a collaption in
Speaker 1: stock prices and the devaluation, people are suddenly saying, oh
Speaker 1: my god, China isn't really independently growing. They haven't been
Speaker 1: for years. But perceptions have reality, and we'll then have
Speaker 1: enough follow on consequences with effects on commodity prices and
Speaker 1: currencies and other developing countries. That's that's that's what's there,
Speaker 1: and that's if there's a recession out there in the
Speaker 1: next twelve months or so, I think that's probably where
Speaker 1: it would would be generated. Thank you to my guest
Speaker 1: Gary Shilling for spending so much time with us. Be
Speaker 1: sure and check out our podcast extras where we continue
Speaker 1: the conversation. Check out my daily column on Bloomberg View
Speaker 1: dot com. Follow me on Twitter at Riholts. I'm Barry Ridhults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Okay,
Speaker 1: so this is the podcast portion of the show where
Speaker 1: I stopped worrying about the time segments and we could
Speaker 1: chat about anything before and I know I have to
Speaker 1: get you out of here at a certain time, but
Speaker 1: that'll be easy. Before we started ask talking about some
Speaker 1: other the questions that we've missed and some other stuff.
Speaker 1: These are all my questions. I have to ask you
Speaker 1: about the bee keeping. You're you're famous on Wall Street
Speaker 1: for for being a beekeeper and mailing out honey to
Speaker 1: various people as as holiday presents. Yea, including myself. I
Speaker 1: have I have a tub of honey, and I believe
Speaker 1: and you have a different inscription every year, and the
Speaker 1: one that stands out was the FEDS funny money can't
Speaker 1: buy this honey. Yeah, this year as treasury bonds saw
Speaker 1: our bees make more. There you go. We always try
Speaker 1: to find something topical and usually related to the financial factor.
Speaker 1: How on earth did you get into beekeeping? Well, it's
Speaker 1: an interesting story I've got. We live in suburban New
Speaker 1: Jersey and I have a bunch of drawer fruit trees
Speaker 1: around our premises, and I didn't think they were getting
Speaker 1: pollinated properly. Uh. And I had this based on what
Speaker 1: what makes you wake up one day and say, I'm
Speaker 1: not sure our fruit trees A bunch of blossoms are
Speaker 1: not that much a lot of fruit? Okay, that makes sense?
Speaker 1: Very simple road tests Anyway, I had this romantic idea
Speaker 1: of putting in some bee hives, and my wife kept saying,
Speaker 1: come on, this is this is this is no far
Speaker 1: Mrs Suburbia. Well, then our third son, who was an
Speaker 1: animal ever since birth, did his senior college thesis on bees.
Speaker 1: And that's all it took to push me over the edge.
Speaker 1: So in afternoon when wait, wait, wait, he does his
Speaker 1: his college thesis prompted from you, unprovoked, totally independent, totally independent. No,
Speaker 1: there was no leading the witness on that one. So
Speaker 1: he's doing this and and so uh uh he and
Speaker 1: I smuggle in a couple of highs one afternoon one.
Speaker 1: What's how physically well the hive is the vertical essentially, Well,
Speaker 1: you stack them up, you stack up the boxes. But
Speaker 1: the but the box that the dimensions are are sixteen
Speaker 1: and five inc inch wide, nineteen and seven acients long,
Speaker 1: and they're varying depths. And I can explain to you
Speaker 1: why they why the dimensions are Okay, this is very interesting.
Speaker 1: Bees have have been kept since uh time in millennia.
Speaker 1: Uh and by the way, honey never never spoiled. They've
Speaker 1: taken it out of ancient Egyptian tombs which is just
Speaker 1: as good as the day the bees made it. Really, Yeah,
Speaker 1: I had no idea. I know it was good for
Speaker 1: a long time. I don't know it was good o now.
Speaker 1: Throughout this time though that they had bees, they were
Speaker 1: in various cavities and so on. There's what's called the skeps,
Speaker 1: which is a it's a series of concentric rings. Have
Speaker 1: you ever seen a Utah road sign beehive state, that's
Speaker 1: a skeps. You know. It's a traditional kind of round
Speaker 1: kind of thing. And and and the bees would be
Speaker 1: in there and they when the left of their own devices. Uh,
Speaker 1: the bees make it has a hexonical cells, but they
Speaker 1: look like stags being down. Well, the way they harvested
Speaker 1: the honey was they basically killed the hive. They would
Speaker 1: use sulfur smoke kill the hive and then crush the
Speaker 1: combs to get the honey out. Well, that was very
Speaker 1: inefficient because they had to have about twice as many
Speaker 1: twice as many hives as they were going to harvest. Uh.
Speaker 1: And also after the advent of kerosene, that's Colonel Drake
Speaker 1: Droll as well, for lights, there was not the need
Speaker 1: for bees wax for candles, so wax, and it takes
Speaker 1: about ten times as much nectar to make a pound
Speaker 1: of wax as a pound of honey, so this is
Speaker 1: very inefficient. In eighteen fifty one eighteen fifty one. Now,
Speaker 1: honey bees are from the old all from the old world.
Speaker 1: They came here with the European settlers. The Indians called
Speaker 1: them the white man's fly. But a congregational preacher in
Speaker 1: Philadelphia named Lorenzo Langfroft, Lorenzo Langfroft made a very interesting observation.
Speaker 1: He noticed that the v would only the bee would
Speaker 1: only build, and the worker bees to do all this.
Speaker 1: The drones don't do anything. She would only build her
Speaker 1: comb within about three ace of an inch of any
Speaker 1: other solid object, including another another comb. So he developed
Speaker 1: from that what's called the movable frame five you might
Speaker 1: you might our listeners may have seen those. In other words,
Speaker 1: he put these in there, and and the bees they built,
Speaker 1: they built out the wax coomb fill them upon. He
Speaker 1: put a cap on there. You can take them out,
Speaker 1: scratch off the caps, put in a central fuge, spin
Speaker 1: them out and put them back. Okay, now coming back
Speaker 1: to the dimensions. He's the father of modern beekeeping and
Speaker 1: those dimensions that I mentioned sixteen and five hy those
Speaker 1: were the dimensions of some scrap lumber he had. It
Speaker 1: wasn't a conversion from Netrick, but he was so influential
Speaker 1: that that became. Now it's a convenient size. But the
Speaker 1: guy never made a dime out of this because it
Speaker 1: was so easy to copy. But yeah, that and and
Speaker 1: so that now and you have these These boxes are
Speaker 1: various depths. There's usually do two boxes on the bottom
Speaker 1: that the bees live in year round and they have
Speaker 1: their honey to get through the winter. They have their
Speaker 1: brewed in there, and they have um poland, which as
Speaker 1: the nectar they feel they feed to the larva. And
Speaker 1: those boxes nine nine and five ah deep, if they're
Speaker 1: full of honey, they weave eighty five pounds. So the
Speaker 1: ones you stack up on top are called supers, and
Speaker 1: that's the honey we're gonna take off. And they're not
Speaker 1: as deep as you can lift them, because try try
Speaker 1: lifting eighty five pounds at at at at the shoulder height.
Speaker 1: It's it's good for the for the stomach. Monthsls. My
Speaker 1: dogways eighty five pound. One of my dogs eighty five pounds.
Speaker 1: And I know when I had a carry him. I
Speaker 1: know eighty five pounds an to lift um, so that's amazing.
Speaker 1: So but anyway, start you've been doing decades. Yeah, we'll
Speaker 1: start off. And anyway, this their son, Steve. He took
Speaker 1: off for a job and the euro dollar pits in
Speaker 1: the Chicago Murk and I and and I had been
Speaker 1: I'd just been the flunky. He was a beekeeper. And
Speaker 1: it was like, if you're ever driven with somebody repeatedly
Speaker 1: to the same destination, they do the driving, you don't
Speaker 1: pay attention. That was me. He takes off. I'm instantly
Speaker 1: promoted a head beekeeper. So and I guess why then
Speaker 1: we were upped about twenty hives and so how much
Speaker 1: spaces is physically taking in the backyard. Well, I've got
Speaker 1: fifteen of them in our residents in Short Hills, New Jersey.
Speaker 1: And I've got about horror on the grounds underground, underground
Speaker 1: in a corner of the property. Uh. And but I
Speaker 1: got about a hundred hives total, and and most of
Speaker 1: the well they're more further out Morristown, New Jersey area.
Speaker 1: And then I've got some we have a beach house
Speaker 1: on Fire Island some out there. But uh, but anyway,
Speaker 1: but you know, this thing very it just keeps growing
Speaker 1: and it's very labor intensive. But I got one. I
Speaker 1: got a guy on my staff. We spend a lot
Speaker 1: of time working with me on this. You're talking about
Speaker 1: the bees labor or your labor, well and both. But
Speaker 1: but I didn't attend the thing to grow. But the
Speaker 1: damn thing just keeps growing. How many pounds of honey
Speaker 1: do you generate? Well? Uh, this year, this year we
Speaker 1: took off pounds and that's a ton of change of honey. Yeah,
Speaker 1: and we give it all away. If I ever sold
Speaker 1: any i'd have to keep keep keep the books. And
Speaker 1: I don't want to make myself cry because my time
Speaker 1: would be probably worth a quarter an hour and probably
Speaker 1: with a minor sign in front of it. But it
Speaker 1: very tremendously. Last year was our best year ever pounds
Speaker 1: and we saw us three tons of hunter. Yeah, we
Speaker 1: haven't stacked all over the office. And and my my admin,
Speaker 1: Beth Grant, she keeps saying, come on, uh, we don't
Speaker 1: need this much honey. I think she really hopes we
Speaker 1: don't have a great year because trying to figure out
Speaker 1: where we're gonna have stacked all over the place. So
Speaker 1: what if how has these how how has these colony
Speaker 1: collapse diseases been impacted your highs. That's probably one of
Speaker 1: the biggest misconceptions. In two thousand seven sixty minutes, the
Speaker 1: TV show did this segment on colony collapse disorder. Now,
Speaker 1: what that means is the bees leave the hive and
Speaker 1: they can't live long on their own outside. That's clear.
Speaker 1: They don't come back. Um. And they said, this is
Speaker 1: the the end of the world. Well, it's actually no more,
Speaker 1: no more food pollination. About about a third of everything
Speaker 1: we eat depends on insect pollination, andent of that is
Speaker 1: from honey bees. In any event, they said at the
Speaker 1: end of the world. Well, what they didn't really they
Speaker 1: didn't do their homework, because this is a reoccurring problem. Uh,
Speaker 1: it's about every twenty five years. The first observation of
Speaker 1: this country was eighteen sixty nine, and it's gets on
Speaker 1: the way. Now it's not the problem, but there are
Speaker 1: but there are other serious problems. Uh well uh And
Speaker 1: as a matter of fact, they just had a huge
Speaker 1: study announced last year. All the big name U. S.
Speaker 1: D A. Anomalogists and the guys from the big schools
Speaker 1: where there you know, like Cornell and University of Maryland
Speaker 1: and Penn State and U C. Davis and so on,
Speaker 1: and they came up with three three areas, and everybody's
Speaker 1: waiting with braided breath for what's the problem with bees?
Speaker 1: How do we get out of this? The first one
Speaker 1: has to be that's interesting, It isn't uh no, that's
Speaker 1: the first guest. Pesticides. They said, maybe, but they're not
Speaker 1: at all sure, and interestingly enough, their European counterparts were
Speaker 1: absolutely possibly convinced it was pesticized, and two months ago
Speaker 1: these Europeans said, we're not so sure. But that's one.
Speaker 1: The second one is nutrition, farmers, fence, farmers, plant fence,
Speaker 1: road defense road and there's not a lot of wildflowers
Speaker 1: to give bees the the nectar and pollen that they need.
Speaker 1: So what they're doing is there encurreaged road defense room,
Speaker 1: meaning it's all cast crops, crops most of them don't
Speaker 1: tend to have any nectar that are Pollen's interested in
Speaker 1: the piece. But what they're doing now a lot of
Speaker 1: cases is uh they're encouraging. They're encouraging farmers to use
Speaker 1: marginal land to plan there. There's an outfit, for example,
Speaker 1: called h called pheasants unlimited. Uh. They're in the Upper Midwest,
Speaker 1: and they basically raised pheasants and quail for for hunters.
Speaker 1: And and what they do is they provide the seed
Speaker 1: to farmers and and uh, and the nectar and pollen
Speaker 1: are as good for the bees, and then the seeds
Speaker 1: that chicks the pheasants and the quail chicks eat it,
Speaker 1: which makes them better to be harvested by the hunter.
Speaker 1: So there, and then the third that's fascinating because there's
Speaker 1: a farm near where I live, which is where I
Speaker 1: get my peach raspberry pies, called Young's Farm, and I
Speaker 1: noticed they have rows and rows of plantings. And then
Speaker 1: along the edge which is adjacent to the street, probably
Speaker 1: not harvestable. They have just a whole run of wildfire.
Speaker 1: And that's that's what's being done. And that's that's helpful,
Speaker 1: but it's you know, it's not on a big enough scale.
Speaker 1: Then the third problem, which is probably most interesting, is
Speaker 1: a parasitic mic called verroa v A r r O.
Speaker 1: Read something about this. Now this is there there are
Speaker 1: five races of honey bees. The only one that's commercially
Speaker 1: valuable is UH. The Latin. The scientific name is APIs
Speaker 1: malafra APIs b malafra honey. Um. Now that one orange
Speaker 1: original bees are off from the whole, from the from
Speaker 1: the old world. This one originated in in uh Southern
Speaker 1: Europe and the Middle East. There's another race in the
Speaker 1: in the Southeast Asia called APIs Serena. And this this
Speaker 1: roa mite is indigenous indigenous on APIs Serena and APIs.
Speaker 1: And this this roa mites hangs on the bee, sucks
Speaker 1: out there quota or blood. APIs SaRenna recognized this as
Speaker 1: the bad guy, and they grew them off each other.
Speaker 1: They pull them off each other. It jumped over the
Speaker 1: Apisa and they don't understand it's a bad guy. So
Speaker 1: you and and so one they co evolved together, and
Speaker 1: that's how they managed to whoever figured out you need
Speaker 1: to take this off. Now we see their offspring around.
Speaker 1: If you didn't co evolve, you may not have developed
Speaker 1: that behavior. But but now they're they're they're right. Now
Speaker 1: you've got to treat with chemicals. Um are absolutely positively
Speaker 1: that high will be done in two years now. Yeah, yeah,
Speaker 1: you don't treat until you take off the honey. But
Speaker 1: we're gonna eat, of course. But they're but they're doing
Speaker 1: some interesting things. Monshano has some interesting work where they
Speaker 1: kill the mites believe the bees that you're trying to
Speaker 1: kill one insect without killing another insight, and they're and
Speaker 1: they're using some genetic uh, some some genetic modifications to
Speaker 1: basically in effect try to disrupt the breeding cycle of
Speaker 1: of the mice. That's a that's an experimental stage, but
Speaker 1: that that has that's probably the greatest thing. But this
Speaker 1: is this is a serious problem. And the thing is
Speaker 1: he's mice mutate. I mean that the treatments that worked
Speaker 1: just beautifully ten years ago are worth anything because they mutated,
Speaker 1: and the ones now sounds like penicillin resistance. It's a
Speaker 1: how did you get from? It's amazing how first of
Speaker 1: all you you've obviously studied this in great detail, But
Speaker 1: as an economist, I don't really think of the next
Speaker 1: logical step as well. Of course, beekeeping should be well
Speaker 1: that there there are, there are, there are, and treads
Speaker 1: aybury and such as okay, well let's see. Well the
Speaker 1: one that is not common but I like is it's
Speaker 1: good physical exercise and particularly on a nice day, I
Speaker 1: like to be outside. Uh. And you don't get a
Speaker 1: lot of that when you're sitting behind your desk on
Speaker 1: the lecture circuit or whatever. But you see the distribution
Speaker 1: of labor amongst the hives, that's got to be an
Speaker 1: entire Yeah. But the other interesting thing is that this
Speaker 1: with all these diseases and pests that beset honey bees
Speaker 1: in the last couple of decades, it is Uh, there's
Speaker 1: a whole logic, deductive logic sequence I go through when
Speaker 1: I open a hive. I open a hive, I'm looking,
Speaker 1: I'm listening, I'm smelling. Is there a coin there is
Speaker 1: she laying? If not, what do I do? I come
Speaker 1: home from a day in the in the b yards
Speaker 1: out with the bees, I'm rung out, not only physically
Speaker 1: but mentally. You wouldn't think that, but it is. And
Speaker 1: and beekeepers tend to be above average intellect. You've got
Speaker 1: to have a natural curiosity because and another interest. Economists
Speaker 1: just average inte life. So so bas you're saying that
Speaker 1: the beekeeping is a greater intellectual challenge than No, I'm
Speaker 1: not saying greater, but that's what I'm here. I'm hearing.
Speaker 1: Anyone can be an economist to be a beekeeper. And
Speaker 1: I know economics, it's plenty, but it's it's it's a
Speaker 1: di virgence. It's it's it's sort of a you know,
Speaker 1: I'm a type of guy. I always work. I just
Speaker 1: change the venue and and and that's what it amounts to.
Speaker 1: Where you're you're shifting, you're shifting gears to to something else,
Speaker 1: but you're still going through that that mental process of
Speaker 1: trying to figure out what's going on there. It's like
Speaker 1: it's like the economy you're trying to you're trying to
Speaker 1: put all that we talked about this earlier, trying to
Speaker 1: put all these pieces together and see where you come out.
Speaker 1: And uh, and you're never can be certain and and
Speaker 1: and be keeping Hey, the visistant visistitudes the nature are tremendous.
Speaker 1: You do everything you possibly can. It's just like a forecast.
Speaker 1: You cover all the bases and you're you're left a
Speaker 1: certain amount of luck some rents from then. You know.
Speaker 1: I just I just was speaking at a conference and
Speaker 1: the exact same convert station came up with you do
Speaker 1: X and Y and Z. They all seem so different.
Speaker 1: In my answer was they're really the same thing. You
Speaker 1: look at a variety of ambiguous inputs, try and figure
Speaker 1: out what matters and what doesn't and reach a reasonable
Speaker 1: conclusion within the context be keeping in economics, apparently the
Speaker 1: same same basic the process is what's so similar even
Speaker 1: though it's totally different. Um that that that that's quite fascinating.
Speaker 1: So earlier we were talking a little bit about, um,
Speaker 1: what it was like when you were researcher at Mary
Speaker 1: lynch In a researcher at the Federal Reserve. What what
Speaker 1: are some of your commentaries or research forecasts that you're
Speaker 1: especially proud of that really have stood the test in
Speaker 1: time or may have been unusually contrarian. What what stands
Speaker 1: out to you? Well? I think I think the greatest
Speaker 1: call I made was just one. I made a bullmark
Speaker 1: that we're entering a von Rally of a lifetime. And
Speaker 1: was that a lonely call? Where there are peoples? Barry
Speaker 1: was so lonely. I wrote my first book in title
Speaker 1: The title was is inflation ending? Question mark? Are you ready?
Speaker 1: Question Mark? My answer to the first question, yes, Yes,
Speaker 1: inflation is ending. We're going into a period of of
Speaker 1: lower and lower inflation because my view is at government
Speaker 1: excess spending is the route of inflation. The FED may
Speaker 1: be the handmaiden and implementing you. But it's the government spending.
Speaker 1: And we saw a revolt against government, starting with Proposition
Speaker 1: thirteen in California in nineteen seventy eight and then Reagan's
Speaker 1: election in nine eighty. And I said from that that
Speaker 1: inflation was on the way out, and as a result,
Speaker 1: we were. And so the answer to the second half
Speaker 1: of the question, are you ready, no, because everybody was
Speaker 1: betting on inflation. They had all their tangibles and their portfolios, uh, coins, antiques, artwork, goal, etcetera.
Speaker 1: And I said, no, no, you don't have enough stocks
Speaker 1: or bonds because they will benefit from this. Now, that
Speaker 1: was a very lonely call that book. Mcgrawl hill finally
Speaker 1: got it out in nobody but inflation really peaked in
Speaker 1: nineteen eighty, but nobody believed. The sales of the book
Speaker 1: were an absolute disaster. As a matter of fact, McGraw
Speaker 1: hill gave us the last couple of thousand copies. They
Speaker 1: didn't want him. But it was but interesting in six
Speaker 1: By then it was clear that inflation was fading. Uh.
Speaker 1: There were two ex post reviews. One was in the
Speaker 1: Boston Globe and the other was a Seattle Post Intelligencer
Speaker 1: and they both you know, and both of these business
Speaker 1: editors said, I saw this book, Oh my god, it
Speaker 1: was happening, and they and so they wrote reviews. Well,
Speaker 1: of course that was his hand as a pocketing your
Speaker 1: underwear because the book was long out of print. But
Speaker 1: it was a paric victory. But but yeah, I mean
Speaker 1: that was that was very longly. I don't think there
Speaker 1: was anybody else, at least notable known forecaster who was
Speaker 1: saying anything like that. So so let me push back
Speaker 1: about your your claim that it's the government's bending and
Speaker 1: deficits that cause inflation. We have a nineteen trillion dollar
Speaker 1: federal deficit and yet inflation is well non existent and
Speaker 1: and going hard. Yeah, it's it's uh, yeah, I have
Speaker 1: to fill that out and say, it depends on the
Speaker 1: rest of the economy if you have an over employed
Speaker 1: economy to start with, and then you put all that
Speaker 1: government spending on top of it. But what you see,
Speaker 1: that's what happened in the late sixties and seventies very
Speaker 1: different today. You had, Yeah, you had a huge government
Speaker 1: spending on war, on poverty and war in Vietnam, and
Speaker 1: that really strained resources on top of a twenty year
Speaker 1: private sector bull market generated generated all that inflation. Well,
Speaker 1: again you've got the reversal that starting. And so now
Speaker 1: we have the retiring boomers, We have a whole lot
Speaker 1: of underemployment. People working part time would rather work full time.
Speaker 1: Um what else do we have in this environment? You
Speaker 1: have increased global Yeah, that that's that's I think that's
Speaker 1: been the greatest The greatest change in the last thirty
Speaker 1: years is globalization. And so let's talk about globalization, but
Speaker 1: I also want to get to I also want to
Speaker 1: get to increased productivity and increased automation as other factors
Speaker 1: that are driving this. So what has been the impact
Speaker 1: of globalization on wages both here in the US and worldwide? Well,
Speaker 1: it's a great equalizes are of wages obviously. UM. I
Speaker 1: had was very interesting. This goes back years ago. Milton
Speaker 1: Friedman had read one of my books. He was in
Speaker 1: San Francisco. He invited me in. It was in an
Speaker 1: apartment there, uh greeting me at the door, hadn't shaved
Speaker 1: in three days, had a bathrobe on. We sat there
Speaker 1: for about three hours talking about about inflation and wages
Speaker 1: and of course what was this Oh gosh, this was
Speaker 1: this is about the mid eighties. And and his point,
Speaker 1: of course is that that free markets govern everything, that
Speaker 1: there's nothing else but and and uh and and I
Speaker 1: was saying, well, you know, wages, you're here, You've got
Speaker 1: an hour you know for the U A W I
Speaker 1: think in this country and two dollars an hour in Mexico.
Speaker 1: And I said, you know, you think it's gonna happen,
Speaker 1: These are gonna equate. Well, they have come a lot closer.
Speaker 1: And and that's what that's what's happened, is that is
Speaker 1: that this is globalization. And of course you had a
Speaker 1: lot of American labor which was enjoying, uh was enjoying
Speaker 1: the fruits of basically isolation. I mean, we did not
Speaker 1: have global competition. But that's clearly changed. Yeah, that that's
Speaker 1: clearly changed. And so what it means is that we
Speaker 1: simply can I compete in in uh, basic manufacturing or anything.
Speaker 1: Even services. You know, you talk about doing routine legal services.
Speaker 1: They do that in India, any place they speak English,
Speaker 1: call centers and so on. So globalization has been a
Speaker 1: very very important factor. And we're dealing with the we're
Speaker 1: dealing with the aftermath of that right now. So let's
Speaker 1: let's along those lines. Let's talk about demographics and retiring
Speaker 1: baby boomers. What does that mean for the overall economy?
Speaker 1: What does that mean for job possibilities and wages? Well,
Speaker 1: what's interesting about that is that is that people are retiring.
Speaker 1: As a matter of fact, the reason the unemployment rate
Speaker 1: has come down uh is UH is basically the people
Speaker 1: dropping out of the labor for what percentage of the
Speaker 1: fall from ten point whatever to five point one percent
Speaker 1: unemployment is people leaving the way little labor for well,
Speaker 1: let's put it this way. If you didn't have if
Speaker 1: you hadn't had the if you hadn't had this participation rate,
Speaker 1: which is anybody sixteen and over who is either at
Speaker 1: working or actively looking for work, if you hadn't had
Speaker 1: that decline from the peak in February of two thousand,
Speaker 1: the unemployment rate today would not not not so that
Speaker 1: many people have left the workforce but are still of working. Well, well, no, no, no,
Speaker 1: that's everybody. Now, we we've got a lot of work
Speaker 1: on that. About six of that are people are over
Speaker 1: are people retiring the post of as retiring, but are
Speaker 1: middle aged people who said, you know, I can't find
Speaker 1: a job, And of course, a lot of younger people
Speaker 1: who said, I'm going to stay in college, I hope
Speaker 1: I get a better job. Of course a lot of
Speaker 1: them came out with big deaths but no better job prospects.
Speaker 1: But what's fascinating about this With older people, and you're
Speaker 1: talking about retiring poster or babies, the participation rates of
Speaker 1: people UH sixty five to seventy four have gone up,
Speaker 1: still pretty good lower, they're lower than younger people, but
Speaker 1: they're going up and over seventy five. And why is that?
Speaker 1: Two reasons. One is people in better health, they're living longer,
Speaker 1: they want to stay actively. Also, a lot of people
Speaker 1: simply do not have the access to retire, So you're
Speaker 1: getting some very interesting diamics within that. But but the
Speaker 1: bottom line is there are a lot of people out
Speaker 1: there now training, having the skills to take jobs. That's
Speaker 1: another issue. But if if you assume, if you get
Speaker 1: people properly trained, there's there's really no shortage of labor
Speaker 1: in the foreseeable future, that's amazing. So let's talk along
Speaker 1: related lines. Let's talk about productivity gains and you directly automation.
Speaker 1: What is the impact of Like in my office, I know,
Speaker 1: we were six seven, we're now seven people were about
Speaker 1: to be eight people. I know that to do what
Speaker 1: we do thirty years ago would have taken fifty people,
Speaker 1: and thanks to computer technology and software, each person does.
Speaker 1: We don't have a bookkeeper. We outsource that to uh
Speaker 1: an accountant who looks at stuff quarterly, who sees everything online.
Speaker 1: A lot of the stuff that we used to do
Speaker 1: with an assistant and a secretary, we that's all automatic.
Speaker 1: It's all done on the on the everybody types. It's
Speaker 1: not like you can be an executive type. And so
Speaker 1: you're doing entering everything into the into the computer. And
Speaker 1: then when you look at different tools like like what
Speaker 1: we get from Salesforce as an example, as a sales
Speaker 1: management of CRM tool, that would have been somebody's full
Speaker 1: time job and now it's one piece of software for
Speaker 1: eight people, it's amazing how much more productive each of
Speaker 1: us are. What does that do to to job creation? Well, uh,
Speaker 1: you know, the whole the whole idea of industrialization ever
Speaker 1: since the industry revolution started in England and New England
Speaker 1: in late seventeen hundreds, was that it destroys a lot
Speaker 1: of jobs. You know that, you know that the origin
Speaker 1: of the word saboteur okay, sabbath. It comes from sabbath
Speaker 1: which were wooden shoes, and earlier the ductal Revolution, the
Speaker 1: workers wore wooden shoes, would grind him in the machines,
Speaker 1: direct the machines because it was putting people out of work.
Speaker 1: They wanted to go back to hand weavers and ah as.
Speaker 1: You've always had this specter of of the destruction of
Speaker 1: jobs by automation. But but what has happened. Of course,
Speaker 1: it's created more jobs, and higher level jobs and higher
Speaker 1: page jobs with more productivity, and that's the basis of
Speaker 1: living standards. We've come to a we've come to a
Speaker 1: bit of a gap recently with globalization. That's one of
Speaker 1: the reasons I think globalization is so important because it's
Speaker 1: given you this huge gap, in other words, more rather
Speaker 1: than a gradual increase in this transfer and and and
Speaker 1: upgrading and so on and getting rid of the secretaries
Speaker 1: and the in house accountants and all the stuff you mentioned. Uh,
Speaker 1: that's happened overnight, and it is simply left a lot
Speaker 1: of people in the US and other western Western economies
Speaker 1: who simply are are not making that transition and not
Speaker 1: prepared to that and it may be a generational deal,
Speaker 1: and I don't think it's the end of the world,
Speaker 1: but it is a it is almost a a quantum
Speaker 1: shift shift there because of globalization. So so you mentioned
Speaker 1: that as we've gone through the industrial era and as
Speaker 1: we've seen um more and more heavy manufacturing put people
Speaker 1: out of work, but at the same time creat other jobs.
Speaker 1: When we look at technology technical especially biotech, internet, computer technology,
Speaker 1: the amount of job loss that that's created, is that
Speaker 1: really going to be offset by new and related jobs
Speaker 1: in that space, Because that's the big concern of a
Speaker 1: lot of people, is that there are people who are
Speaker 1: creating software, creating technology that allows each person to do
Speaker 1: so much more. You've eliminated a huge swath of jobs.
Speaker 1: The jobs are being created just where that Where are
Speaker 1: they geographically? In other ways, are they in this country
Speaker 1: or are they in China? And now low end manufacturing
Speaker 1: moving on from China to lower cost areas Bangladesh, Vietnam,
Speaker 1: Pakistan and so on. Well, we see the iPhone which
Speaker 1: is designed in the in the United States, design in
Speaker 1: San Francisco, but essentially it's manufactured in China, with components
Speaker 1: and other parts made all of the world. But the
Speaker 1: bulk of which are in low cost countries. So what
Speaker 1: is and yet there's also an app economy where all
Speaker 1: these software designers and all these people are making a
Speaker 1: whole run of different software to put on that that
Speaker 1: work pretty much anywhere, but they're mostly the United States, UM, Europe, India, Japan,
Speaker 1: places like that. So is that technology creating more jobs?
Speaker 1: And it's creates creating more jobs, and of course it's
Speaker 1: it's adding to income polarization because those are those yeah,
Speaker 1: those are those are high skilled jobs, those are high
Speaker 1: paid jobs. But what you've eliminated are these auto factories
Speaker 1: in this country that employed five thousand people that that's
Speaker 1: out Now. One of the interesting things coming out of this,
Speaker 1: and particularly with what's going on right now, we've had
Speaker 1: eight years of basically no real income growth in the
Speaker 1: US and really Europe, Japan they developed world nowers adjusted
Speaker 1: for inflation, no no growth. People get frustrated after a
Speaker 1: while of that, and what's happening. We're beginning to see
Speaker 1: that expressed politically. For example, in France, the National Front
Speaker 1: headed by this woman Maria la Penn. She may be
Speaker 1: the next president of France. It's a very you may
Speaker 1: end up with Bernie Sanders or done Trump in the
Speaker 1: in the US, and and of course John Baynor, you know,
Speaker 1: and there's this reaction to politicians in the center and
Speaker 1: looking at the fringes UK the head of the new
Speaker 1: head of the Labor Party. I mean, you're getting very
Speaker 1: interesting expressions of this. UH. And of course you know
Speaker 1: we're not talking about French revolutions now where people out
Speaker 1: there tear it down the beast steel, but it is
Speaker 1: it is a similar kind of impulse and we could
Speaker 1: get some very interesting political ramifications. So we just saw
Speaker 1: that in Greece with Left coalition. Although I will tell
Speaker 1: you the craziest thing, so we're recording this UH in
Speaker 1: the beginning of fall two thousand and fifteen, so we
Speaker 1: don't know the outcome of the election for any of
Speaker 1: you in the future listening to this. We don't know
Speaker 1: a lot of things. But one of the things that
Speaker 1: I find fascinating is when you look at the shocking
Speaker 1: and sudden rise of Donald Trump politically, he's much more
Speaker 1: centrist then either the bulk of the Republicans on the
Speaker 1: right and the bulk of the Democrats on the left.
Speaker 1: I'm amazed that when you strip away the bluster. He's
Speaker 1: kind of a centrist, old school politician. How did who
Speaker 1: would have saw that coming? A few Yeah, but you know,
Speaker 1: it's a hell raising aspect. It's like what was that
Speaker 1: movie Network News where the guys because you know, I'm
Speaker 1: not going to take it an Yeah, absolutely, I mean
Speaker 1: it's it's that it's that same kind of the same
Speaker 1: kind of reaction, and that's what he's Bernie Sanders. I mean,
Speaker 1: of course he's way to the left, but it's that
Speaker 1: same kind of same kind of appeal. It's kind of saying,
Speaker 1: the centers politicians have not solved the problems. We got
Speaker 1: to do something else, and and there's a there's a
Speaker 1: big hearing for that kind of thing. So this is
Speaker 1: a this is a this is a kind of a
Speaker 1: cycle within the cycle, if you want to use cycles.
Speaker 1: And we talked about whether they're relevant or not. But
Speaker 1: you've had you've had globalization going on for you know,
Speaker 1: about three decades. But now in the aftermath of the
Speaker 1: global Great Recession oh seven oh nine, we're having this
Speaker 1: period of slow growth, as I called the age of
Speaker 1: d leveraging, no no growth and real incomes. And and
Speaker 1: as a result, I think the combination of these things
Speaker 1: is putting a lot of pressure on the political system
Speaker 1: and and the conventional politicians really don't know how to
Speaker 1: react to this. So let me ask you a question
Speaker 1: about that. And I'm not sure where I pulled this
Speaker 1: number from, but there was some news article out not
Speaker 1: too long ago that said, the middle class has not
Speaker 1: seen in real terms, um forget nominal terms, but in
Speaker 1: real terms, has not really seen wage gains since nineteen three.
Speaker 1: I think that's I think that's I think that's probably valid. Yeah,
Speaker 1: if you look at if you look at real wages
Speaker 1: and uh, you know that pretty much is that their
Speaker 1: insurance costs are up in the Indian real family income,
Speaker 1: That's that's what those statistics show you. And and you
Speaker 1: know the growth has has come on on the on
Speaker 1: the top. There's a lot of income redistribution to look
Speaker 1: people on the bottom. And you know, people can say, oh,
Speaker 1: this is this is terrible, and of course the pope
Speaker 1: is that was his theme as as well. But you know,
Speaker 1: you say, if you if you have rapid growth, if
Speaker 1: you have a dynamic economy, it is going to sort
Speaker 1: out the people who have the skills in order to participate.
Speaker 1: You look at China. Look how many billionaires are in China?
Speaker 1: And you say, well, yeah, but this is a country
Speaker 1: with a average income of what about a sixth of
Speaker 1: what we have. But yet when you see dynamics the
Speaker 1: people who take up, now you can say, well, that's
Speaker 1: not that's not equal distribution. But that's a judgment call,
Speaker 1: that's not a market call. So what does the United
Speaker 1: States need to do to sort of restart that economic
Speaker 1: engine and go from forget five percent, how about going
Speaker 1: from two percent to over three percent? Well, I think
Speaker 1: I think a certain extent, it's really just a matter
Speaker 1: of having patients and letting this whole agent be leveraging
Speaker 1: and run its course. Now, once people are no longer
Speaker 1: buried with debt they picked up in the last cycle,
Speaker 1: that's right activity that's after that, we are going to
Speaker 1: see a return to rapid growth and it will be
Speaker 1: led by by technology and productivity. So you're up for
Speaker 1: a guy who's says the bond bull market is still here.
Speaker 1: You're fairly optimistic. Oh, I am in the long run,
Speaker 1: very much so. And one of the reasons is my
Speaker 1: basic philosophy. You know, I mean, right now, the easy
Speaker 1: long term uh forecast to sell is slow growth forever.
Speaker 1: Because everybody looks around us. That's what I see right on, brother,
Speaker 1: You look at people like like Bob Gordon, Professor Northwestern.
Speaker 1: He's going around saying everything that is really productive, that's
Speaker 1: worth inventing, has been invented. Modern, by the way, we've
Speaker 1: heard that throughout the centuries, and it's always been wrong.
Speaker 1: Modern ma enthusian, and it sells very well. Neil Ferguson
Speaker 1: at Harvard, Uh, things are being dragged down by dragged
Speaker 1: down by regulation and so on. Larry Summers, you know,
Speaker 1: democratic fergusonsest stick to history. He's a terrible economic connentator.
Speaker 1: Every time he talks about economics, he manages to get something. Well,
Speaker 1: it's not major. But what what I'm saying, Barry, is
Speaker 1: that that's the easy cell. And you know, I'm always yeah,
Speaker 1: it's yeah, And I'm always looking for, you know, where's
Speaker 1: the hidden flaw that that's that's that's how I made
Speaker 1: my career, is looking for where's the where's the why
Speaker 1: is it going to go wrong? And in this case,
Speaker 1: you know, for example, they say that, uh, Gordon says
Speaker 1: that the Internet and so on is finished. Computers, it's
Speaker 1: all realized I think those things are more in their
Speaker 1: infancy than there are for I mean, just just you
Speaker 1: be a couple of examples. The American Industrial Revolution started
Speaker 1: in the late seventeen hundreds, grew like topsy, but it
Speaker 1: didn't get big enough to move the economy until after
Speaker 1: the Civil War. I mean it ter yeah, railroads again
Speaker 1: they started l seventeen hundreds, not until the latter half
Speaker 1: of the nineteenth century. I mean, it takes a long
Speaker 1: time for these things. And you know, you look at you,
Speaker 1: and I have have cell phone. I mean this has
Speaker 1: got more computer partner I b M three sixty this
Speaker 1: this little gasht in your pocket. I jokingly tell people
Speaker 1: there's more computing power on this than took Man to
Speaker 1: the moon with it really is. And and I look,
Speaker 1: and I was taking some pictures and here I am
Speaker 1: on our beach house here, you know, at home around
Speaker 1: I've got just where it records where it is. I mean,
Speaker 1: it's a big brother knows where you are. But but
Speaker 1: but my opinion that we are more in the infancy
Speaker 1: than we are finished on these new technology. Biotechnology, I
Speaker 1: think is is much much more in its infancy and
Speaker 1: what that is going to do for productivity growth in
Speaker 1: the future. Now again, you're gonna have people who have
Speaker 1: the right training. But you know, one of the problems
Speaker 1: we have in this country. One of the problems we
Speaker 1: have in this problem country. And there's a different topics,
Speaker 1: but I think related is the education system and and
Speaker 1: and you know, we have the attitude, Um, we have
Speaker 1: the attitude that everybody ought to go to college. And
Speaker 1: it is true that people with college educations make more
Speaker 1: than high school grads. But you can't prove causality with statistics.
Speaker 1: I guarantee you positively, absolutely, every time there's a total
Speaker 1: eclipse of the of the sun, if you go outside
Speaker 1: and beat a drum, it will go away hard percent correlation,
Speaker 1: no causality. The reality is, in my view, smart people
Speaker 1: go to college. But college doesn't make you smart. And
Speaker 1: I think we need to recognize that and say, Okay,
Speaker 1: there are a lot of people who can have very
Speaker 1: credible jobs. Hey, what's the last time you hired a
Speaker 1: plumber to clean out a toilet? News charge your hundred
Speaker 1: bucks for fifteen minutes work. I mean, you know, there
Speaker 1: are a lot of jobs that are not college educations,
Speaker 1: but they're certainly very credible. There's six estimates are the
Speaker 1: six hundred thousand jobs going begging now for people with
Speaker 1: computer skills to work in factories. And one of the
Speaker 1: things that's happening to solve that is the Germans. They
Speaker 1: have a very strong apprenticeship program history. They brought a
Speaker 1: lot of their plants in the southeast and this country
Speaker 1: and they have these apprenticeship programs combined with two year
Speaker 1: community college degrees, and these guys come out and they're
Speaker 1: very well paid. And American companies are emulating that same
Speaker 1: kind of thing. So I think that's one of the
Speaker 1: most exciting things in education that this isn't say everybody,
Speaker 1: and you know, we have a college for any for
Speaker 1: any intellectual capability in this country. Look at the poor
Speaker 1: profit college is absolute disaster total. They wouldn't exist without
Speaker 1: government subsidies and it is just a waste of moth.
Speaker 1: They came about on their own. Beginning, there was a
Speaker 1: huge movement to the private sector can do this on
Speaker 1: their own. And once they figured out they could suckle
Speaker 1: off the teat of Uncle Sam, they were all over
Speaker 1: and there. Sure, and you know it's an entrepreneur Okay,
Speaker 1: why not? You know, you know, because we know where
Speaker 1: it helps making the money money, the old fashioned way,
Speaker 1: skill luck, Clair biyance Brand's higher work, and so much
Speaker 1: government subsidy you can't miss until they collapse under their
Speaker 1: own way. So so you're really a pretty optimistic guy
Speaker 1: about the future of America. I am, I am, I am.
Speaker 1: I think we've got to get through this. This, this
Speaker 1: the leveraging. How long does at last? Normally? You know,
Speaker 1: if you look at the Ryano Rokoff data, it was
Speaker 1: waiting for it goes ten years. Now they are that
Speaker 1: data is over centuries. It's developed countries, it's banana republics.
Speaker 1: There's a lot of apples and oranges recently, but right now,
Speaker 1: right well recently, you know, if you go back to
Speaker 1: the thirties, it was about ten years. We're eight years
Speaker 1: into this now. At the rate we're going, it may
Speaker 1: take longer than another two years to complete, but I'm
Speaker 1: convinced that it will be twelve years, fifteen years maybe
Speaker 1: something that if you use if you use a straight line,
Speaker 1: the financial sector in this country has probably got another uh,
Speaker 1: five or six years ago. The consumer working off xces
Speaker 1: Stat's probably maybe a little bit longer, maybe seven eight years.
Speaker 1: But that's just drawing straight lines. So you're guessing we're
Speaker 1: halfway through. And as I mentioned earlier that one of
Speaker 1: the really interesting questions is is our is the electric
Speaker 1: going to have the patience to go through this, or
Speaker 1: we're gonna get a react action. We're gonna get some
Speaker 1: oddball uh in oddballs in Congress and administration. Are we
Speaker 1: going to see a big push for goverment stimulus? And
Speaker 1: if we do, I think it will be fiscal. It
Speaker 1: won't be monetary, because you know we've already I think
Speaker 1: we've exhausted the monetary Yeah. Well that's the traditional listen.
Speaker 1: Following the Great Depression, even following the two thousand recession,
Speaker 1: we saw a huge surge of fiscal stimulus that's been
Speaker 1: more or less missing this go around. What what would
Speaker 1: the impact of that be to the de leveraging process.
Speaker 1: Well it uh, I don't know that would necessary, it
Speaker 1: would necessarily reverse it. I mean, but it it could
Speaker 1: mitigate it. It could speed it up a little bit,
Speaker 1: speed it up a little bit. Yeah, and could speed
Speaker 1: it up. I just want my roads paved. You know.
Speaker 1: People accused me of being uh, well, well you're a
Speaker 1: big guy. No, No, I'm tired of replacing axles I
Speaker 1: want you know my run flat tires show up as
Speaker 1: flat because there were so many people know that. That's
Speaker 1: That's a big difference between monetary and fiscal policy. Monetary
Speaker 1: policy is a very blunt instrument. The Fed and other
Speaker 1: central banks you can raise and lower interest rates, can
Speaker 1: buy and sell securities. That's yet and beyond that, the
Speaker 1: ship's fallwhard and you don't really see that immediately. Yeah,
Speaker 1: the ships fall where they may. Fiscal policy can be pinpointed.
Speaker 1: If you want to improve the roads, you put money
Speaker 1: into road construction, if you want to help the unemployed,
Speaker 1: increase unemployment benefits. It can be very very specific. It
Speaker 1: doesn't say it's going to be efficient, doesn't say it's
Speaker 1: going to be I'd like our electrical grid to be upgraded.
Speaker 1: It's it's terrible. It'd be nice if our ports were secure.
Speaker 1: We know that they're still vulnerable to foreign or terrorist attacks.
Speaker 1: And I are on the same page here. I think
Speaker 1: infrastructures is really and if you go if you travel
Speaker 1: to Asia or Europe, our cellular system is awful, and
Speaker 1: our broadband, where we essentially created this technology, we're now
Speaker 1: the back of the but we are terrible compared forget Korea,
Speaker 1: who kicks our but most of Europe is three to
Speaker 1: five times faster than US and cheaper. Yeah, it's in credible.
Speaker 1: Yeah alright, so I know I only have you for
Speaker 1: a few more minutes. Let me go through some of
Speaker 1: my favorite questions to ask people and we'll get you
Speaker 1: out of here on time. Um. So, before before you
Speaker 1: came to Wall Street, you mentioned you're working for Standard Oil.
Speaker 1: What what did you do for them? What was your
Speaker 1: pre Wall Street experience? I was an economists there. They
Speaker 1: had what was called a general economics department. They had
Speaker 1: uh economists that covered various segments of the world. I
Speaker 1: was in charge of the US and Canada in terms
Speaker 1: of forecasting and analysis of the economy. And that was
Speaker 1: a time when the major corporations they had two things
Speaker 1: they knew they had to have. You couldn't go to
Speaker 1: lunch with your fellow CEOs and other wizards without having them.
Speaker 1: But they didn't know what to do with either one.
Speaker 1: And one was econ economists and the other was computers.
Speaker 1: That's fascinating. So from that you decided from that and
Speaker 1: from that I decided, Uh, you know, in Standard Oil
Speaker 1: was it is a huge company obviously well run company.
Speaker 1: It's going to be there forever, but it was fairly bureaucratic,
Speaker 1: and I wanted to imagine a little more active, and
Speaker 1: that's why I went left for Wall Street. So, so
Speaker 1: let's talk a little bit about some of your early
Speaker 1: mentors who really influenced your You mentioned the professor at
Speaker 1: Amherst who impacted your your career clearly mentor who else
Speaker 1: was a mentor of yours? Um, who influenced your thinking?
Speaker 1: I'm not sure I could name I. You know, I
Speaker 1: thought about that earlier. We talked about that, and I'm
Speaker 1: not sure I could I could mention. I mean, I
Speaker 1: I never, for better or worse, very I don't think
Speaker 1: I ever had had the mentor. So let me ask,
Speaker 1: let me rephrase that question slightly differently. What books throughout
Speaker 1: your lifetime have you found especially influential? Um. I guess
Speaker 1: some of the some of the basic books on the
Speaker 1: economy and and uh um. But I think it's been
Speaker 1: more the philosophical aspects and some of the some of
Speaker 1: the some of the great thinkers who give us some examples.
Speaker 1: You mentioned Milton Freedman or earlier. Yeah, certainly, I know
Speaker 1: you don't agree with everything. He said. You know, Kane's
Speaker 1: had a lot of interesting things. Um. My two thesis
Speaker 1: advisers of Sanford ed Shawn Jack and Jack Early. They
Speaker 1: came up to the idea that money pervaded in finance
Speaker 1: and everything had a degree of money, even insurance policies. Uh.
Speaker 1: But um, I can't say that I really studied under
Speaker 1: you know, one great mentor and U or another. So
Speaker 1: so let's talk about the financial industry. Obviously a lot
Speaker 1: has changed since you first joined Wall Street back in
Speaker 1: the late sixties. What do you think is the most
Speaker 1: significant shift we've seen you finance over the past forty years. Uh,
Speaker 1: it's probably the poriferation of financial instruments. When I when
Speaker 1: I got in, uh to Mary Lynch, and that was
Speaker 1: in nineteen sixty seven, you had fixed commission rates. Um,
Speaker 1: everything was pretty well regimented. No competition, no, yeah, no
Speaker 1: real competitions we know today regulation. I mean they even
Speaker 1: had resale holes, uh, fixed retail prices. You couldn't go
Speaker 1: into the store and buy you know, couldn't buy to
Speaker 1: a toothpaste where the price wasn't fixed in many cases. Uh.
Speaker 1: But I think what's happened is first First, first of all,
Speaker 1: you have opened things up with allowing competition starting with
Speaker 1: may Day and a fixed commission race in nine, and
Speaker 1: then also the proliferation of computers and an ability to
Speaker 1: trade and moving away from individuals curities. I remember Mary
Speaker 1: lynch Uh their trading operation that was looked like a
Speaker 1: race track where they had these belts that went around
Speaker 1: in a in a big view and a guy would
Speaker 1: take an order and stick it in um in this
Speaker 1: track and would go around with the guy on the
Speaker 1: other side. It would process, and I mean, you know
Speaker 1: it's it now. You push a button and it yeah,
Speaker 1: I mean, you know, music and well, and not only that,
Speaker 1: we're at the point now where these guys want to be.
Speaker 1: It's so fast that they want to be a short
Speaker 1: a distance physically from that hundred and eighty six thousand
Speaker 1: miles a second, okay, but they want to be half
Speaker 1: them closer. Don't travel that fast. But you know, I
Speaker 1: mean that that kind of thing has has really and
Speaker 1: if you remember the beginning of The Big Short if
Speaker 1: you met that book by Michael Lewis, they talked about
Speaker 1: all of these high frequency trading op brokerage firms that
Speaker 1: locate just outside of the Holland tunnel, so they're the
Speaker 1: closest to the feed from from all streets. And then
Speaker 1: these guys from Chicago laying a fiber optic cable in
Speaker 1: a dead straight line, didn't care what was in the way, mountains, houses,
Speaker 1: just buy it and blow through it. And now they're
Speaker 1: replacing that with you know, over the air microwave point
Speaker 1: to point broadcast, so you don't even have to lay
Speaker 1: fiber optic. You can just go. You have to have
Speaker 1: a series of jumps because the curvature of the earth
Speaker 1: gets in the way. But that's how important speed was
Speaker 1: to those guys. And and and the question is are
Speaker 1: we able to handle this uh in terms of the
Speaker 1: effects of this. And we've seen this with you know
Speaker 1: fair uh seven uh stock market nose dive one one day.
Speaker 1: We've seen him with flash crashes into bonds, and more
Speaker 1: recently we saw that with the E T F crush
Speaker 1: And and yeah, and and the question is are we
Speaker 1: are we really up to speed with with this? And
Speaker 1: and then you have a much better question. And this
Speaker 1: goes back to a lot of what we talked about
Speaker 1: about automation and so on. Has that made us any
Speaker 1: better decision makers? I'll tell you one one one one
Speaker 1: uh one book that I always read. It's a whole
Speaker 1: bunch of them. It's it's Shakespeare. I'm a great fan
Speaker 1: of Shakespeare. And you go back and you say, you know,
Speaker 1: first of all, that guy said things in an elegant
Speaker 1: way that none of you know, every the best line
Speaker 1: I've ever written is going to be big, is worse
Speaker 1: than the worst line he ever wrote. But you look
Speaker 1: at these and you say, has anything really changed? How
Speaker 1: are we making any better decisions with all this technology
Speaker 1: and speed? I'm not sure we have? And is this
Speaker 1: this mean that it's given us more confidence that we're
Speaker 1: you know, we're going bad and with more confidence than before.
Speaker 1: I mean because you think, well, all that data is
Speaker 1: available and so on, So I'm not sure that that
Speaker 1: we're able to synthesize that data any better. And and
Speaker 1: of course everybody else has the same data. And are
Speaker 1: you any better off really in terms of for you know,
Speaker 1: you're a forecaster, I'm a forecaster. Are we making better forecasting?
Speaker 1: We did twenty years ago? But it's feels to me
Speaker 1: that all this technology and all this high speed um
Speaker 1: not specialists, not people who have an obligation to make
Speaker 1: an orderly market. It makes it feel like the market
Speaker 1: structure is a little less stable or a lot less
Speaker 1: states Well, I think that I think that's true. And
Speaker 1: and and you really say, is that is that simply part?
Speaker 1: Is that part of the you know, does that go
Speaker 1: with the territory? And you just have to expect these
Speaker 1: periodic uh glicies and and and and uh, you know
Speaker 1: the puke point you reach me occasionally is it is
Speaker 1: this this part of the whole deal? And you you
Speaker 1: live with it? And I say, that's that's part of
Speaker 1: the deal. But but you know the thing about finances, finance, fundamentally,
Speaker 1: the justification for finance is a grease the wheels of commerce.
Speaker 1: It's it's if we had a barter system would be
Speaker 1: pretty if it would be pretty rough? Uh too much
Speaker 1: what finances? But I think finance, and particularly leading up
Speaker 1: to the collapse of nine in two thousand a, a
Speaker 1: lot of those guys felt they were an end of
Speaker 1: themselves and they're only their only job was to make money,
Speaker 1: and they didn't really think about are we contributing anything?
Speaker 1: Are we improving productivity? Are we are we making it
Speaker 1: possible for investments uh to get to get productive things?
Speaker 1: Done in the economy, and I think there's I think
Speaker 1: there's a lot of site and loss of of what
Speaker 1: the ultment game, ultiment objective of finances. I couldn't I
Speaker 1: couldn't agree more so that's historically looking back. Let me
Speaker 1: ask you, UM, next question, what do you see as
Speaker 1: the next important shifts in finance going forward? UM? Oh, gosh,
Speaker 1: it's probably gone to do with globalization. UM. So no
Speaker 1: more less of an impact of national borders than you have. Yeah,
Speaker 1: I mean, you know, you mean that the technology is there,
Speaker 1: and yet you do have you still have, you know,
Speaker 1: separate right regulations, separate exchanges. Um. There's there's a lot
Speaker 1: of of particularly in Europe, where they're trying to combine
Speaker 1: this but on a on a global basis. But you know,
Speaker 1: when when money can move around, move around at the
Speaker 1: touch of a touch of a key stroke. Um. The
Speaker 1: idea that you're moving into different regulatory jurisdictions because guys
Speaker 1: are always going to try to game system, they're going
Speaker 1: to look for the lowest regulatory climate. And I think
Speaker 1: that's probably something that's we're going to see is a
Speaker 1: lot more global control of of financial flows, not not
Speaker 1: control in the sense of big brother, but just common
Speaker 1: regulations so that it's it's all under the same all
Speaker 1: under the same regulatory framework. So so down to my
Speaker 1: last two favorite questions. And and let me ask you this.
Speaker 1: So the millennials, the people are just graduating college who
Speaker 1: we were discussing earlier. If one of them approached you
Speaker 1: and said, Gary, I'm interested in the career finance, what
Speaker 1: advice can you give me? What would you tell them? Uh?
Speaker 1: Other than other than to become a great economist, of course, Uh,
Speaker 1: I would. I would probably advise them to try to
Speaker 1: find an area where you are doing something is productive
Speaker 1: and you're not just glorified shuffer of paper. Uh. Trading.
Speaker 1: Trading is important. It lubricas the system. But but trading
Speaker 1: just for the sake of making money. I mean, you
Speaker 1: look at you look at corporate finance. Um, if you
Speaker 1: go back, you know, take Goldman Sacks that used to
Speaker 1: be an investment banking house and and their job was
Speaker 1: to their job was to work with clients and to
Speaker 1: raise money for them to do investments and productive things.
Speaker 1: And it was a win win situation. Uh. The client
Speaker 1: got the got the issue place, investors were satisfied with
Speaker 1: it most of the time. And and uh, the investment
Speaker 1: banker got a fee. Okay, now what Wall Street has
Speaker 1: evolved in his trading houses, and that isn't a win
Speaker 1: win situation. It's a zero sum game. There's a winner
Speaker 1: and a loser. Whether it's not like every it's not
Speaker 1: like the pie is getting bigger. I don't think if
Speaker 1: I were advising somebody, I'd say, I don't think you
Speaker 1: ought to be in that, uh, in that zero sum
Speaker 1: game business, because I somehow well, I don't think it's uh,
Speaker 1: you know what, whether whether it just makes a lot
Speaker 1: of money for you and you and you moved to
Speaker 1: the Hamptons and so on, but it's not fulfilling and
Speaker 1: it's not but I'm not sure. I'm not sure how
Speaker 1: sustainable that is. And then my final question, what is
Speaker 1: it that you know about investing and finance and economics
Speaker 1: today that you wish you knew when you began way
Speaker 1: back in the nineties sixties. Mhm Uh. It's probably a
Speaker 1: lot more respect for the unknowns out there and the
Speaker 1: vicissitudes of nature, and the realization that the best laid
Speaker 1: plans of mice and van gang Off the galat that
Speaker 1: you can that you can have a great forecast and
Speaker 1: all the fundamentals fall into place, and markets just simply
Speaker 1: do not confirm it. And the way I put it
Speaker 1: is marcuts can remain irrational a lot longer than we
Speaker 1: can remain solvent. I've heard that somewhere. Well, Gary, thank
Speaker 1: you so much. This has been a delight. Um. If
Speaker 1: people want to find your your newsletter or your research,
Speaker 1: how do they go about tracking you down while they
Speaker 1: can track us down? It's our website Www. A Gary
Speaker 1: Shilling dot com. And you now have a Twitter handle.
Speaker 1: I noticed, Oh yes, of course, and it's and it's
Speaker 1: the same same at A Gary Shilling. Fantastic. Well, thank
Speaker 1: you for spending so much time with us today. You've
Speaker 1: been listening to Masters in Business. If you enjoy this conversation,
Speaker 1: look up an Inch or down an Inch on iTunes
Speaker 1: and you'll see the other sixty or so podcast we've had.
Speaker 1: Let me make sure to say thank you to my
Speaker 1: head of research, Mike pat Nick and my producer Charlie Volmer.
Speaker 1: Be sure and check out all the rest of our
Speaker 1: other interviews. I'm Barry Ritults. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio.