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

Episode Summary

Executive Summary: Barry Ritholtz interviews economist Gary Schilling about his path from physics to Stanford economics, his long career at Merrill Lynch, and his contrarian macro views. Schilling argues forecasting is an art, the Fed is largely impotent in a deleveraging era, bonds still have upside, oil can fall much further, and slow growth plus globalization and automation are reshaping jobs, politics, and finance.

Main Topics: Career path and forecasting philosophy (Priority: 5/5): Schilling explains his move from physics to economics, his training in econometrics, and why he sees forecasting as disciplined judgment rather than a purely quantitative science. Wall Street and Merrill Lynch history (Priority: 4/5): He recounts building Merrill’s economics department, being the firm’s first chief economist, and how Wall Street’s research culture evolved from a tiny club to a large industry. Deleveraging, the Fed, and slow growth (Priority: 5/5): Schilling argues the post-crisis economy is defined by deleveraging, making monetary policy far less effective than many assume, while fiscal policy could be more targeted. Bond market outlook and inflation (Priority: 5/5): He defends his decades-long bond bull thesis, tracing it to falling inflation and government excesses, and says long bonds can still rally materially. Oil, OPEC, and energy prices (Priority: 4/5): He explains the oil collapse as a cartel price war driven by OPEC’s strategy against cheating and the marginal economics of shale and Gulf production. Globalization, automation, and labor markets (Priority: 5/5): Schilling links wage stagnation, job displacement, and political populism to globalization and automation, while arguing new jobs are being created at higher skill levels. Beekeeping as a parallel discipline (Priority: 3/5): A long, detailed detour into Schilling’s hobby of beekeeping, which he treats as another exercise in observation, logic, and dealing with uncertainty.

Key Arguments: Forecasting is not a pure science; it requires history, judgment, and attention to what the consensus is missing. The Fed’s quantitative easing and low-rate policies had limited effect because liquidity largely inflated asset prices rather than broad economic demand. After the financial crisis, deleveraging in households and financial institutions keeps growth structurally low and slows recovery. The 30-year bond market still has room to rally because disinflation and low growth support lower yields. Oil can drop to the $20-$25 range because the marginal cost of production in key regions can remain positive even at very low prices. Housing remains weak because the U.S. is overhoused and many owners are underwater or unable to participate in normal turnover. Globalization has compressed wages and exported routine jobs, while automation increases productivity but also polarization. Political backlash and populism are partly a response to years of weak real income growth and perceived policy failure. Beekeeping and macroeconomics are similar in that both involve assembling ambiguous signals and making reasoned judgments under uncertainty.

Data Points: Real GDP growth since recovery started: 2.2% - Schilling says U.S. growth since the middle of 2009 has been about 2.2%. 30-year Treasury yield in 1981: 15.21% - He cites this as the starting point for a decades-long bond rally. Projected 30-year Treasury yield: 2% - Schilling says he expects the 30-year bond yield to fall from around 3% toward 2%. Bond return from 3% to 2% yield: 30% - He estimates this move would produce roughly a 30% price gain on a 30-year coupon bond. Banking money multiplier then: 70 to 1 - He says fractional reserve banking once turned reserves into about 70 times M2 money. Banking money multiplier now: 1.4 to 1 - He contrasts current weak credit creation with the past. OPEC production: 30 million barrels/day to 31.5 million barrels/day - He says OPEC effectively removed quotas and lifted output during the price war. Oil market surplus: About 2 million barrels/day - He says global supply exceeds demand by roughly this amount. Honey produced in one year: 2,500 pounds - He says his operation harvested this much honey in the referenced year. Best honey year: 5,400 pounds - He says this was his largest annual honey harvest. Number of hives at residence: 15 - He says he keeps about 15 hives at his Short Hills home. Total hives: About 100 - He says his overall operation includes roughly 100 hives. Unemployment rate without labor-force decline: 13% - Schilling says the official unemployment rate would be much higher absent falling participation. Share of labor-force decline due to retirement: 60% - He attributes about 60% of the decline to retiring baby boomers. Share of labor-force decline due to discouraged/other workers: 40% - He says the remainder is middle-aged and younger workers stepping out or staying in school. Estimated jobs going begging: 600,000 - He cites this figure for computer-skilled jobs in factories. Length of deleveraging process: About 10 years historically; possibly 12-15 years here - He references Reinhart-Rogoff and suggests the current deleveraging may take longer. Fiscal deficit mentioned: $19 trillion - He discusses high federal deficits while noting inflation remains low.

Pivotal Quotes: "forecasting, in my view, is an art. It’s not a science." — Gary Schilling: He explains his approach to economic forecasting and why models alone are insufficient. "the Fed is pretty much irrelevant in my view." — Gary Schilling: He argues quantitative easing and ultra-low rates have had limited real-economy impact. "I think we’re going to go to 2% on the 30-year bond." — Gary Schilling: He restates his bullish long-term view on Treasuries and falling yields.

Implications: Listeners should expect a world of slower growth, persistent policy limits, and continued market distortions from low rates. Schilling’s framework favors patience, skepticism of consensus, and attention to structural shifts in labor, politics, and asset prices.