Gary Shilling recently joined Jim Puplava on FS Insider to discuss Gary's economic outlook. Gary explained why the economy wasn't doing well even before the coronavirus hit and tells listeners this recession is here to stay through 2021. He also discussed consumer confidence and interest rates. See below for excerpts from his interview.
For audio, see This Is a Bear Market Rally Similar to 1929, Says Gary Shilling.
Gary, you’ve been on Wall Street since the 1970s; have you ever seen anything like this?
Well, let me give you two answers to that. First of all—and we wrote about this earlier in the year— the economy was really slipping before the coronavirus. The growth in wages was declining, job availability and job expenses were slowing. So, the economy was not hunky dory. I think most people would prefer to say everything was just hunky dory until the virus came along; those people really weren't looking at the facts.
The second answer is yeah, we haven't had anything like this, certainly nothing since WWII. The coronavirus completely closed down the economy. Look back at the subprime mortgage collapse that started in 2007 and 2009 and really, it only directly affected a few people. Of course, it then spread nationwide and gave us what was until then, the sharpest recession since the 1930s. But it was only people who had speculated in housing and were very heavily leveraged in subprime mortgages who were directly affected.
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This time, COVID-19 affects everybody. Virtually everybody has been in lockdown to one extent or another and it’s global. It’s a much more widespread phenomenon. That's one of the reasons I just think you can see a rapid V-shaped recovery and hear people say ‘all is well and it was only a few months down and now we’re back to the races.'
We’ve seen a spike in savings rates in the U.S. and I don’t think consumer confidence will fully come back until we see a vaccine.
Well, that's certainly my view. I think there’s been a huge blow to consumer confidence. Until you get a vaccine that not only works but is distributed widely and people have a feeling they can go out and not worry about a second wave. And some of the states that have opened up like Arizona, they're seeing a resurgence of the virus. I think we're a long way out still.
Last month, people saved 33% of their after-tax income— that's unprecedented. As you point out, people were home and they couldn't spend money. Also, some of the things that they normally would spend on like mortgages, they deferred for four months. That was a part of the federal bailout program. So, there's some funny business going on there, but there's no question that people have exercised a tremendous amount of caution.
The consensus now, as reflected in the stock market, is the second quarter is a write off but that'll soon be ancient history. But I think there are lasting effects. I mean, supply chain disruption is certainly an important aspect. We're finding out how many basic materials, including basic drug components came from China. There has been a protectionist trend in the world in the last 10 years or so. There’s going to be a reorientation of supply chains. And when people get back to work, are they going to have plexiglass partitions? It's just to say that going back to where we were, I think it's just totally unrealistic.
By the way, you've never had a stock market decline, and there was a 34% decline in the S&P, that was retraced in less than 11 months. And in this case, there was only one month before you started to see the rally. So, again, I think it's a rally in a bear market.
I think we're looking very much at a situation like 1929. In 1929 between September and November stocks sold off 48%. Everybody said, well, we're not going to flop off of the 1920s, the roaring 20s, and they rallied back 52% of that decline into July of 1930. But then, as the depression became apparent, stocks resumed that slide and they ultimately were down 89% from the peak.
I think it's the same kind of thing. We're seeing a bear market rally and as the reality of a long, stretched out recession and slow recovery dawns on people, we will see resumption, probably another 30% or 40% decline in stocks, with recession stretching into the next year.
Could we see interest rates go negative? About a month ago, short-term T-bills went briefly negative.
Yeah, we do have negative rates, not only in the short term, but all out even to the 10-year area in Europe, particularly in Germany. Other countries in Europe have negative rates too. The Bank of Japan’s 10-year bond is at zero, but their short-term rate is negative.
I think we probably won't have negative rates in this country, mainly because the Fed is going to set rates. That's what they did in WWII up until 1951, when they had what was called the Accord. The Treasury and the Fed agreed that they would stop pegging interest rates. They pegged them to make it cheaper to finance the war.
But the point is that the Fed doesn't like negative rates. The reason is because the experiment in Europe and Japan has not resulted in people's borrowing and spending. What happened is quite the reverse. People said, ‘oh golly, my financial assets are declining in value with negative rates. I've got to spend less and save even more for retirement or other purposes.’ So, it's had exactly the opposite effect.
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