Gary shilling
It's great to talk to you and I'm really excited
About this because you had a long and varied career and you also are making some non-consensus calls right now
That we want to get into and as I told you before
We started talking off camera that I wanted to go through the long arc of your career
but then get to that non-consensus call that you're making right now because I think that we're at a critical juncture in the
Economy. Let's go back all the way to
Standard Oil, you know my understanding y'all haven't read your bio is is that you didn't start out on Wall Street
But you actually started out as an economist at an oil company. My biggest question is is why?
Was an oil company looking for a macro economist
That's interesting and Standard Oil, New Jersey, which was the largest of the US oil companies
they had what they call the general economics department and
It really I think was because the Board of Directors and the Board of Directors. They were all inside
Employees, they were guys who'd worked up through the ranch. They weren't outside people. I think they thought that economists or something
that was kind of good because everybody had one there were two things that
They all felt they had to have and they didn't know what to do with them one was computers and other was economists
So it was it was not a terribly useful
vehicle I I went from their
Standard general economics department to what was called coordination and planning which was getting closer to the action there
But then I left in four years and became Maryland's first chief economist and been basically in wall street ever since right
well
Tell me about that transition to
tomorrow and then white weld and what your thoughts are on how that was as compared to standard oil and
Give me a sense of what the environment was on Wall Street back at that time
Well, I was always interested in markets and of course
Merrill Lynch was a lot closer to markets in at least in my position and then
Standard Oil New Jersey was or Jersey as it was called in sight and it was interesting
One of the things that you had to learn the jargon
When I went there and they talked about defensive stocks. I thought they meant defense stocks
You know frensley meaning things that are less volatile like utilities and consumer staples as opposed to things making air
Planes and ships and so on and so forth and it was a it was a different atmosphere. It was it was sales driven
And I did a lot of work with particularly the institutional salesmen in covering pension funds various fund managers
mutual funds etc, etc, but it was a lot faster paced and
Environment and one and I enjoyed much more. Yeah and
Merrill versus white weld, I mean what what's the difference there?
Also the marrow of then versus the marrow that we know before blew up in 2008. What can you tell us about that?
Well my history at Merrill Lynch was kind of checkered. I
Forecast I went there in 1967 and I forecast correctly the 1969-70
Recession but that wasn't being bullish on America in the Merrill Lynch parlor. So the guy running the shop
Donald T. Regan, he was layer Secretary of the Treasury and chief of staff the White House
We had a disagreement
Obviously he won I took my entire staff went to white weld with no idea that in 1978 Merrill issued by white weld
So the story on Wall Street was just really true with Schillings
The only guy fired twice by don regan
So I decided to limit the odds of that
Third time and set up my own shop. But but white weld was a it was it had been a a
You know white shoe
very sort of conservative
firm that had really grown by financing pipelines when they're building pipelines from Texas up to the east and
they kind of rested on their laurels and it's interesting goldman sachs at that point was very much a
smaller operation
Well earlier than that but goldman sachs was out there soliciting clients and building relationships and y12 wasn't and I think that's why
eventually white
well again sold the Merrill Lynch because Don Regan wanted and Investment Banking Department and white weld was
definitely for sale and then that's sort of how
Merrill became the behemoth that it is because before it was more into the stock broking interestingly enough
I when you say white weld immediately it popped in my mind at mark Fabra. He actually was as well. Yeah
Yeah, that's where he he and I met there. He was a well. He was first a sort of a
Under study if you will and then he was he was liaison between the research department and the foreign offices
so he would get questions coming in and he come over and and
Economic question we talked about it and he composed we composed
The answers and that's how that's how we got to know each other, but it was a good firm
really enjoyed it being there and
And but you know that there's been a transmission transition in in Wall Street and you know Merrill Lynch
well, you know interesting thing of Merrill Lynch when there was made a
1975 when they when they
Unbundled Commission. So there was that was the end official commissions and I had since that coming and in the
because in the in
1973 soon after I got there there was a whole host of big-name economists testifying to Congress
This is Milton Friedman and all these guys who basically said there's no justification or fixed race and Wall Street
Like like open markets, you know
They couldn't exist without competitive markets except in one minor area where we fix our commitment our fees
And so I went to Don Regan and I said, you know
I think that fixed commissions are going to go and Merrill Lynch would probably set the
Commission's being the biggest of the retail brokerage houses
And so he said well
I you may be right, but do a study on this and I did and it was probably the first cost accounting
attempt at a cost County study of any wall street house because Merrill Lynch at that point they basically
assumed that their basic business was was stock brokerage in listed stocks, and it was on the new yorking and
American Stock Exchange, and that bore all the costs
And everything else was saying of a subsidiary with no accounting for costs or revenues or anything else. So we
Devised a system and treat Merrill Lynch as a bank in fact
Which lent and received money from its functional subsidiaries and it really was an odd situation. I mean like in commodities the
customers put up more money as
Margin than the then the broker puts up with the commodity exchange. So it generates capital what they were losing money now
How do you compute contain a return when you're generating capital? But losing money? What's her return?
It was it was really interesting exercise, but nothing much came of it
But I think it was at least I learned an awful lot about how Wall Street firms actually
worked from a financial standpoint, you know, I
Don't know in terms of sequencing whether I want to get to what happened in terms of 78 or move to the economy
But let's try talking about, you know
You already sort of for shouted it in 78 when you left because of Don Regan and you went out on your own
How was that for you in terms of that transition?
Well it was
it was it was a kind of rough because
my wife and I and our four small kids we didn't have a
Meaningful assets and you know to suddenly basically be fired that was a it was a it was a bit of a trauma
But I have some good backing
What was a major trading operation the biggest?
trader on the New York Stock Exchange spear leads in Kellogg
I knew those people and they formed a provider contingency long and we set up we never drew on it luckily
but but at least we had backing and and we did have a
Lot of the clients that we had and we build up a business with in white weld not only serving financial institutions
but also industrial corporations companies like like like 3m and
AO Smith and major
Industrial corporations and we were able to bring all that business with us
So we got off to a start but you know
It's kind of scary when you're when you're suddenly out on your on your own and and you've got to start and and no no
big meaningful capital as a Cushing
Yeah, I can imagine and for me I'm thinking though and some level, you know
that four-year juncture between 78 and 82 could have been fortuitous and not fortuitous because you were going out right at the
Period I think that was the most volatile in terms
The the end of that inflationary cycle and the seventies taking me back to what you're thinking. Well, it was actually actually in
by the late seventies I
Concluded that inflation was on the way out
Now the first book I wrote upon that the title was is inflation ending question mark are you ready question mark mcgraw-hill
Probably said in the early eighties
but what I saw was a
Turning of the populace against Washington. It had previously the conviction that Washington
Really knew what they were doing
And but then he had two things that really destroyed confidence one was was Vietnam
Which of course is very unpopular and the other was the Great Society program
So it didn't really work and of course they generated he was inflation because you simply had excess demand on a fully employed economy
Well, something happened in 1978. It was called proposition 13 in California, which was it basically limited the the
increases in local property taxes and it still exists and that to me was an inkling that
Because California no colorful and there's a rootless society. Most people have moved in. They're from someplace else. They don't have strong traditions
They don't show you further. It's hula-hoops or for inquires or in this case limits on government spending
You can see things start in California know they're going to spread nationwide
but anyway, I saw that and then of course, you got to the election of Reagan in 1980, and I said
You know that this is a change of environment
because I saw the the root cause of inflation as being excess demand and
So that's why I started forecasting the demise of inflation and with that a huge decline in interest rates
Treasury bonds at that point where were long-term Treasury bonds earlier bonds were yielding fourteen point six percent
So that was an extraordinary opportunity
For appreciation because of course as as the yields go down the price goes up
and what did you think by the way of Volkers attempt to deal with monetary policy by
The money supply targeting the broad money supply which was a fail in the end
I mean, did you think that was gonna work? Well, I you know, of course it's debatable
I think a lot of people would give good vulgar credit
But I think it was really a shift in the attitude
Of the American people and you know Booker couldn't have done what he did if they hadn't had the populist behind him in effect
You know, I think inflation was was on the way out
Anyway, before he before he acted, you know
They jacked up interest rates about 20% short-term interest rates and you precipitated to back-to-back
Recessions and and but that was that was the beginning of the unwinding but you know if it had just been monetary policy
Why would you have inflation coming down for you know now almost 40 years? Well, I mean the peak was in 1980
So I think was I think was a much more profound change than simply monetary policy and it is profound
I mean we're gonna get to that at the end in terms of whether or not that cycle that you're talking about
Persists and continues now, but that was the the beginning of the great bull market
The interesting bit is you know before this yesterday you sent me a chart on
How we think about things when we think about the great bull market?
We usually we think about equities and we think about 82 is the beginning and potentially continuing on
but the chart you sent me was about zero coupon bonds tell me about that because it was shocking how the
outperformance differential well, I started
investing in in 30 years zero coupon Treasuries now zero coupon bonds
Don't pay any interest
but they are issued at a discount and the interest in effect is is
in effect built in the difference between the the issue price which is below 100 and they're they're
They're expiring at at a hundred it's built in now the fact that it's built in it has big advantages
When interest rates come down you don't have the reinvestment risk
Enormous if you invested let's just take an example. Let's say you invest in a 10-year
Yielding security and and the rates dropped to 5%
Well, you've got to reinvest at 5% you no longer can invis at 10% that's gone
But the zero coupons build that in so you get actually about twice as much
appreciation for given decline in interest rates for the zero coupon as
With a coupon bond and the longer the maturity the the more bang for buck. Now it works both ways your lose
What am I afraid to go up?
But actually I started in with the zero coupon bonds for my own account in
1981 and by and by the mid-80s the shilling family on that one investment had achieved financial independence and
It's it's been a tremendous
Asset as a matter of fact since the early 80s and we have we have us documented that these zero coupon
Bonds have outperformed the S&P 500 by five times. That's including dividends. Yes and P
But a lot of people that you know, they think that Treasury bonds are for little old ladies and orphans
Well, I've never never never bought Treasury bonds for yield. I couldn't care less what the yield is as long as it going down because
When it goes down they increasing in price and it's you know, I I born for the same reason
Most people buy stocks. Most people don't buy stocks for for dividends
You have some for utilities and real estate investments
But most people are looking for appreciation and that's that's what my interest in in Treasury bonds, you know
We're going now into
asset allocation and stock picking and
Investments and so forth. I understand that you have been associated. I think it was with for since nineteen
eighty three one of the longest standing writers at Forbes and you know
They even though you're an economist they picked you as one of their
You know favorites
Analysts of the market how did that come about? We're really, you know came about this through some various people like various people. I knew
who had
been writers at very places and ended up at Forbes and invited me in there to meet Jim Michaels who was just
Legendary editor he was as one of these guys who ate nuts and bolts for breakfast and then moved on to solid food
I mean just a classic
Editor who chews you up and spit you out, but you learned a lot from him, but I got involved in
1983 and you know his attitude at Forbes as if you've seen it anyplace else it won't be in Forbes
He wanted things that were truly unique now. I don't think that was always true
Right, but he was very insistent on and that's how I got I got started
I got started there and at Forbes and been writing from them ever since a matter of fact
I've been on they have Steve Forbes as these what they call crews for investors
and there's one coming up in second half of July that I'll be on in the Baltic where I'll be speaking and then they have
Investors there or listen to the lectures, but he visits st
Petersburg and various countries in airberlin various countries and around the Baltic. So I've done that a number of times too
So that's a another
Aspect of the Forbes relationship this relationship you had with them has been through something like the Reeb isness cycles
I think it was the 1990 downturn
there was the 2000 the 2008 and now we're still
Potentially, we're not at the end of the in the fourth downturn. I mean when you compare what could be happening now?
What is the severity of?
Today and how would you compare it? What what's the most comparable that you would say?
Well, I I made a career out of looking for four major bubbles
As a matter of fact, I wrote a blast book
I wrote was called the age of deleveraging
investment strategies for a decade of slow growth and deflation published by Wiley in 2010 and
In there, I listed seven different what I call it great calls
We're on that and and these were having to do with major with major cycles and cite three of them
which really I think falling in with what you're interested in one was in the early 70s you have very high inflation and
as a result there was a feeling that
Inflation was going to be in double digits forever. So what happened a lot of
business people
wholesalers retailers
manufacturers doubled and tripled inventory
Double and triple ordered inventories in order to make sure they had supplies because they knew the the cost of replacing those
Would be higher later
Well, it was just one of these coincidence
I'd spent a summer to San Francisco fed when I was getting a PhD
At Stanford in economics and I came across a book called hand-to-mouth blind and it and it described what happened in
1919 when after World War one they took off wage and price control and wholesale prices literally doubled overnight and so at everybody
Ordering these inventories held her skelter. Well, they all arrived and he had the sharpest recession on record in in
1920-21
And I'm a great believer at then the in the repeat aspects of history
History doesn't Mark Twain says history doesn't repeat but it rhymes human nature doesn't change much
So people react with similar circumstances in similar ways
so on a basis of that and in some work
we did in the steel industry that showed that the steel production was not being matched by supposedly what people were
Using up and we said there's a lot of excess inventories
and so when a result of that a correctly forecast at 73 75 recession
Which was a sharpest tone record at that time
Now that was an economic phenomenon that was excess inventories
that they're there to others that you
Alluded to one was of course that go up in the dot-com bubble at the end of the 90s and that was just wild
speculation and
Obviously that came at greevil that was another been looking on that one
And and then the third one of course was the it was a big housing bubble the sub mortgage and we actually started in in
2002
Saying that housing was showing signs of bubble and followed it up and had had very good success
For ourselves and for our clients and in forecasting and demise of housing now those things those three were really outstanding
crises if you will
I don't see anything right now that could could stack up to that mere possibilities a
Corporate borrowing has been very heavy in this country. There's been a lot of
subprime barbering or mere subprime the
triple B's are
50% of bonds and one notch below that they're they're junk and a lot of institutions can't hold junk
They have to sell it. You could get a few millimeters of sell-off another one is emerging markets
they borrowed very heavily in dollars after the Great Recession this
2007 2009 recession but the dollars been rallying. It makes a dollar much
It makes it much more expensive in terms of local currencies to pay for those dollar deaths
That's another source of possible and the third one courses
That is the trade wars with China which we might talk about in more detail
But you know, we you know
Those might blow up
But but I'm not I'm not I don't see those as big bubbles like these three I mentioned they're just waiting to be pricked
So yeah, I think we're we're probably already in a recession, but I think it would probably be a run on the mill affair
Which means real GDP would decline
One and a half to two percent not two three and a half to four percent you had in there
Very serious recessions stocks probably wouldn't fall if they fall the average you take out those three and look at the average
stock fall it was
22% from the peak in the other recessions on average and that would take you a little bit below a couple hundred points SNP
Points below where it was on Christmas Eve
So now from here it would be a shock to people but but I'm saying I don't see a catastrophe out there
You know you sit in a very Placid sanguine way, but I mean you're making a very bold call in terms of the recession
Let's unpack that I mean because my understanding is is from the last letter that you wrote the last insight you were saying
Actually, we could be in a recession right now. What's the data behind?
well
if you look at if you look at a number of things you looked at the previous weakness in housing now that
Looks like it may be a bottom because of the decline in mortgage rates, but industrial production is declining
employment picture, you know
75,000 payroll employment increased last month, which is
Extremely low about a third of what was what was average you look at the New York Fed. They have a
recession indicator, which is now in
Recession area you look at the Organisation for Economic Cooperation
Development indicators, they're declining. There's just a whole host of
Indicators that are declining the thing about recessions is that you never know
You're in one until almost. It's all over the
2007-2009 recession the most severe since the 30s the National Bureau of Economic Research, which is the official arbiter of this
No administration ever wants to declare a recession
No, no, no leave that to this private organization and they started setting business cycles back in the 30
So they're the guys who call the shots
They did not say that that December
2007 was the peak which it was until a year later
December 2008 because what happens it takes time for the data to come in and
Then you get all the revisions and it Peaks
The revisions are on the downside almost invariably they let me explain why let's say employment
They want to release the employment numbers the first Friday of the month following the month in question
They want the data out there while it's still relevant, but they don't have all the survey results in there
So, what do they do?
they base their their initial estimate partly on a surveys and
partly on the momentum of recent months now when you're at a peak the momentum moves up like this and then when they get the
Rest of the survey data in you get a downward revision
And that's what's happened in the last three months early in the year
The revisions were up in employment now in payroll employment now, they're down the last three months
That's that's probably the strongest indicator
Matter of fact I'm like, you know
I write
Columns for Bloomberg online and I'm just I just agreed I'm gonna do one on that my next column as a matter of fact
interesting
you know because I know that the revisions wiped away even the
75,000 from last month as you were saying I was thinking about the birth-death model
Which is one of these?
swags that they have in order to understand, you know based upon the number of
Companies that come into being versus the number of companies that are going out of existence in terms of the employment. That's
Created by that small business sector. How does that play into things at the turn of the side?
Well, it's that's always a you know
Obviously the the people at Bureau at the Bureau of Labor Statistics do their absolute best and these are thorough professionals
they can't be fired the
RGS rated
Employees and they they are apolitical and I don't anybody who questions that their?
Biases is really barking up the wrong tree, but you know that they are struggling with the issue in this and this birth-death model
They're trying to say how many businesses came into existence how many went out of business and and that's it
that's a tricky composition, but it
It has a definite effect on the overall
Statistics they revise it every year and then every five years in detail as they get more data
But it can be very distorting in a short-term sense
but again, when you see changes on a month-to-month basis like we've seen recently I I would not write that up to
Some data glitch like that, right? Yeah, I mean so I mean it could be to the degree that the
We're seeing a trend downward in terms of revisions that those revisions will actually increase well
That's a good point. They probably very well would because yeah your your points well-taken because
You're probably a lot more more small businesses going out of business when times are tough because they're the most affected
They're the the least capitalized the most vulnerable
No, you mentioned the New York Fed's
Recession indicator and I looked at that and you know, this is the highest it's been since the last business cycle end, right?
It's you know in the order of twenty nine to thirty percent right now as of their June fourth data
it has to do with where they're getting their numbers from they're talking about the yield curve being a huge impact upon that can you
Talk about yield the yield curve the yield curves inversion and what that really means
Or is signaling about the economy. Well, you know and this is this is really the difference between
Treasury
yields
the most common one is the difference between the the
Yield on a two year Treasury note and a ten year Treasury note
and by the way
Anything issued ten years or less is a note it has to be over that they're called bonds
A lot of people talk about bonds and they're talking about duration maturity of two or three years. Those are not bonds
No, no
No
and that that's why that's why a lot of people deny the
The power of the bond rally in the last almost 40 years because they're looking a very short term
We don't get much bang for buck. Because rates come down. That's another story. But anyway, this two versus ten most common
that is not quite inverted it or whenever it has you've had a recession no exceptions in the post-world War two period
You have had inversion in a three-month bill versus a ten-year
Treasury note and anything under under one year is a bill by the way versus notes and bondage
That's a nomenclature in any event, you know, those are statistics and you have to say what happens there
Well, what happens is when you could when you get to this point in this cycle
The investor is looking longer term in this case a 10-year yield this starts a sense
I think two things one is a recession also lower inflation of not deflation and these both tend to depress
Longer-term yields the Fed though is is always behind the curve so they have their forecasts
But when they make their decisions, I think it's fair to say that they are they're trying to react promptly
But they react to current events
So they don't they don't they're not going to cut the short term rates the overnight Fed Funds rate that they control
Until they see the whites of the eye have a recession
So by then you're in it and the longer-term yields have
Anticipated that so that's why you get this inversion
Now when the Fed cuts rates and question of how soon they're going to do it it's going to be soon
But you know this month next month I remains to be seen but then what you have is you you then the curve
goes back to normal because the short rates are then dropping below the longer-term yields, but I think it's really more of a timing of
Understanding what's going on in the economy. So right now it's the three-month to the three-year yield that is inverted
So when you go from three years to five and five to seven and Beyond it's the normal slope
What do you think that indicates that it's only in that particular section and it's not the two to ten that you're talking about?
Yeah, I I think though that the way things are going and you know
We've had a very strong rally and in Treasuries and in the last and last month or so
and I think it probably wouldn't be
Unless the Fed cuts rates very very soon on the short end
I don't I think we probably will get an inversion and the two versus fan for me
The proof is in the pudding in terms of the feds ability to react quickly
Everyone talks about Jerome Powell doing a huge 180 degree pivot
Like you've never been seen and they've said that that's ruining the feds credibility
You could say on some level that the Fed Jerome Powell is saying look
You know weird less we active than former fed people. I did the 180 because the data want the 180
Well, I wouldn't call it a 180 because they haven't gone from tightening to eat
They went from tightening to pause. I call that a ninety good ninety. Okay? Yeah
the other thing to note though
Is that is that the Fed when the Fed gets in to the point in a cycle where they worried about the economy?
Overheating and they've had this obsession with the Phillips curve thinking the low employment is going to generate inflation
And I think that's because they had too many
Academic economists there and Powell is not luckily but in any event
When you have this situation where where the Fed the Fed finally decides that they are going to cut rates
Then you have to have to look at what's going to happen to
the yield curve and you know, I think the Fed right now is is
They're really worried. But the what the facts is when you get into lateness cycle and they worry about an overheating economy
They raise rates
They never want to precipitate a recession
But my count in
12 of 13 tries in the post-world War two period they got a recession
the only soft landing was in the mid 90s and I defined a soft landings when the Fed raises rates and
Then they lower Manoel recession if they raise them and pause
Until they either either go up or down you don't know what it was a soft landing or simply in the intermediate pause
But they've had only one soft landing now that's using interest rates and the Fed has use interest rates as their policy variable for over
a century now
They have also to deal with selling off this huge portfolio built up the mnemonic amazing
They've never had that to do right before
So you put those together and say what are the odds that they're going to pull off a soft landing?
given their track record with race alone, and now the added problem of
dealing with this excess portfolio talk to me about the
Future here there because basically we already got part of it in terms of what you said about
The fact that it's going to be somewhat garden-variety recession as compared to these other recessions, though
You have had some caveats on that my question on that regard is what's gonna happen in the markets?
over the
6 to 18 month time frame say in
Treasuries not necessarily equities, but
How would you play that?
Given not just what's happening now
But the broad sweep of what you were saying about the zero coupon bonds and rates coming down
Well, I'm on record as saying that that the 10-year yield will probably go to 1% now
It's it's just just about 2% right now
And I I think that will go to 1% and this in the context of a recession and lower inflation. If not,
deflation and the 30-year yield will will go to
2% actually if that happens if that happens on a on a 30-year coupon bond
You make about 20% of your money. It's it's a very good investment
Well, I think we would we would get that decline and that's sort of my terminal rate
That's what I've been saying for many many years
I think he'd get down to 2% on the on the 30-year bond and 10% on the 10-year and that's that's probably yet
And so what I what I dub in 1981 the bond were I said?
We're entering the bond rally of a lifetime. And that's when again when the yield on the 30-year bond was fourteen point six percent
I think that would be over. And after that where the own Treasuries are not depends on
Inflation, I mean if let's say you had a two percent yield and you had one percent deflation chronic deflation
That would be three percent real yield
That would be very good by historic standards historically the the real yield is about two and a half percent
But obviously if you have any inflation two percent yield that wouldn't be attractive on a real on a real basis on inflation adjusted basis
You could say almost to the upside of the trade that you're talking about is what's happening in Europe?
And what's happening in Japan in terms of all the negative yielding assets Germany in particular. I think everyone is just
They're floored by the rates that we're seeing. Okay now yield on 10-year bonds. Yeah
It's a of course a their instant to tional reasons for that, you know some institutions
Insurance companies pension funds they're pretty much required to own
sovereigns government government bonds in this case ones in Germany and also people are saying well
You know if I own eight, I may have a minus four percent yield on a ten-year
German bund Botta field goes to minus six. I'll make money, right?
Or as your so can make money if if rates decline if they don't have the appositive well they have to do is decline and
comparing that to
Actually having to pay to put money in banks, you know, it's a it's a different logic
But it's still as still as still as reasonable. It's it's a crazy world
I mean, but you know for the u.s. You're talking it's not as crazy. However
There are some risk very early on in the conversation. We talked about some of those policy risks in particular we were talking about
China talk to me a little bit about where you think the downside risk is in terms of what's happening from a geopolitical
perspective
You know China has basically grown through exports and where did those exports go?
they went to Europe and North America that was
globalization and and I think that's the most important phenomenon on the global economic stage in the last thirty years basically transfer of
Western technology to China and other low-cost Asian countries and that shifted that manufacturing jobs there and of course
destroyed a lot of people's incomes and then the the exports goods are
Shipped back to North America and Europe, you know, that game is pretty much over
You simply don't have the growth in North America in Europe you had earlier and if you don't have strong growth overall
You're not spending more and everything including including imports
China's exports are our imports
And also, of course you have now a situation where China when we allow them into the World Trade Center in 2001
They promised that they would play by the rules
It'd be a market economy and so on and so forth and they have not and I don't think there's much question of that
They favor their government
Enterprises. They're the ones that get all the capital not they're their
Private companies which are starved. They they steal our
Technology are required to be transferred as a price of doing business in China and so on
So China is really at a crossroads here where and also their growth is slowing their growth as you know
We're running double digits back before the Great Recession. Now they say it's it's a it's a six and a half percent
What they they always overestimate there was very interesting study by the Brookings Institution and they showed that China
Since the Great Recession that they have inflated their real GDP numbers by twelve percent
Cumulative Lee now if it's if it's a constant inflation, you don't care if it's a scale factor
what I I think they have they are more inclined to inflate the numbers now when they're weak than they were earlier because the
Statisticians want to make the guys in at the top and Beijing happy that's better than going to jail. So
Their growth is definitely slowing. Another thing with China there one child per couple policy
Means that for the next 30 or 40 years regardless of what happens to births now
Their labor force is declining
their growth is very much limited unless they have huge productivity growth and they pretty well breached the limits of
productivity growth by importing Western technology
And again Trump is pretty much saying we're not going to we're not going to go down that road route anymore
So so China is is is I think I think the days of China are pretty pretty well over
Doesn't mean they're gonna disappear that the second largest economy
but that's because they got a lot of people there their GDP per capita is
One-eighth of what it is in the US right there. The second world's economy not because of a
High living standard because they just got so many people
Well, you know one thing that struck me in what you just said is the part where you talked about
destroyed
many people's
income that is the crux of the matter in terms of the the
Between the United States and China and and you know what people call the populist backlash. Oh, yeah
how's that gonna play out in terms of this slowing that we were already seen on China, but also
Geopolitical tension from that destruction. Yeah. Well, it's still very much alive
And I think that's what got Trump elected that led to brexit that led to you know this crazy
left-right government in Italy and and the yellow vests in France
I mean all these things are pretty much the same idea that that you know
There's been no growth in purchasing power
For the average worker in the g7 countries
In over a decade and they're they're mad as hell they really and as I say that's led to this
Populism isolette what they're saying is the political forces in the middle of not done the job. We're going to throw them out
We'll try we'll try anything else
I don't think that's going to go away. And if I'm right we're in recession
It will probably in intensify and that'll make it very interesting the 2020 election
Because of course when times are bad any incumbent is at risk don't matter who they are. But at the same time if
trump's able to basically say well I can oh
it's it's those foreigners and that's that's whom he's blamed and it's easy to say it's imports and immigrants as opposed to say it's
globalization globalization is a little harder for most people to understand but I
Don't think this thing is gonna go away anything anytime soon
So I guess we can wrap up with some comments on the positive side. I mean when you
Look at the view holistically. I mean we you've painted a picture of a great
Rally in terms of inflation coming down people benefiting in terms of bonds, but that's coming to an end
Perhaps with the 10-year at 1%
Where do you see the opportunities going forward?
Over the next three the next five years. I I think we'd probably be a a more
Normal, I mean everybody says we're we're gonna get to that great normal and you know that great
normal area there's no such thing as equilibrium equilibrium is simply a a
Momentary point through which you pass on the way to one extreme or the other
I mean the idea you just settle into this guy the Fed always talks about this and everybody that never exists
You look at the number and we've got data to show that but but where do you say where you end up there?
Well, I think you you you will end up with much lower inflation
you will end up with
Blondes, you know probably no longer a big rally, but but maybe returning decent
Inflation is just returns stocks
I
I don't think you can have a very positive outlook for for the kind of appreciation people were thought they deserved
Right the double digit just isn't there in in my view if you look at if you look at this cyclically adjusted
Price earnings ratio put together by my friend Bob Shiller Yale
Nobel Prize winner is you know what it really says is that stocks now are about 40 percent above the long-term norm and and
since the early nineties they have been above that norm all except for about one year the Great Recession and
so they'll spend a lot of time below that in other words you you you will have a
slower nominal growth in the economy and slower and a decline in Pease
Now that doesn't mean that really economy is not going to do
Well, I think that we're going to have a strong productivity growth productivity growth comes from new technology
But the thing about new technologies it takes it takes time to get big enough to matter
If you look for example historically and I'm a great
Student of this in history the Industrial Revolution. It started in England and New England in the late 1700s
But it didn't get big enough to move the productivity needle in the u.s. Until after the Civil War
It started from zero growing very rapidly
But from a small Bates the same thing with railroads railroads started in England late
1700s is only in the second half of 19th century
they got that way the analogy I think today is that things like robotics like
Self-driving vehicles like like really the rollout of computers everything you can do on a smart
I think these things are more in their emphasis more
biotechnology, and I think that we probably are going to see
Tremendous productivity growth in the future. So the basis of real
Strong real growth is there even though we won't have the demographics?
Well, you won't have it because the retiring posts are our babies, but I think I think good very well
See real GDP grow two and a half three percent in a very low inflation environment
So I think it could be a pretty ripe ripe future there. I
Want to leave it with that bright note, Gary
It is very good to have talked to you and I really appreciate your taking the time. My pleasure
