Dr. Gary Shilling: Labor Markets Weakening, Recession Concerns & Why Markets May Wake Up Soon
Summary
Market Outlook: Dr. Schilling sees roughly a 60% chance the U.S. is in or near recession, with cooling labor markets and weak hiring not yet reflected in asset prices.
Fed Policy: He views the market as overly focused on the Fed, noting policymakers are cautious and data-dependent given lags and uncertainty in economic signals.
Risk-Off Positioning: He advocates a risk-off portfolio—long dollar, long Treasuries, and short commodities—avoiding speculative areas like AI-driven stocks.
US Dollar: Bullish on the dollar due to its global reserve status, deep usage (~88% of transactions), and lack of credible alternatives in the euro, yuan, or yen.
Labor & Households: Hiring is stagnant and household balance sheets are stretched by student and credit card debt; high-profile layoffs (UPS (UPS), Amazon (AMZN)) may catalyze broader corporate cuts.
Valuations & Bubbles: He doesn’t see a systemic bubble akin to subprime; pockets of speculation (AI/crypto) exist but are not economy-wide, though a typical recessionary 30% S&P drawdown is plausible.
Debt Risks: Warns about the global “debt bomb” as government borrowing expands without clear limits, raising questions about future demand for sovereign debt.
Economic Resilience: Despite risks, he emphasizes the adaptability of the U.S. and global economies, noting tariffs have been less damaging than feared due to supply-chain adjustments.
Transcript
I think there's probably uh maybe a 60% chance that we're that we're in a recession or very close to it. Uh when the due date new data comes in, that's when the turning points are really revealed uh in full flower. So I think this is the this is simply the reality of a statistical collection process. >> Dr. Gary Schilling, president of a Gary Schilling and Co. an economics consulting firm and a registered investment adviser. It is so wonderful to welcome you back to the show. Great to see you as always, Dr. Schilling. Really appreciate you taking the time. >> Glad to be back. Glad to be back. >> Wonderful to have you as always. The last time we had you on, Dr. Schilling. It was in April, right after Liberation Day. It's been just over six months. I feel like so much has happened in that time. So it would be wonderful to just start with the big picture where we always start that big picture macro view. What is on your radar right now as it relates to the economy and the markets? How are you thinking about the world? Um and as you know, Dr. Schilling, you can take all the time you need to set the table when it comes to that big picture view. >> Okay. Well, uh, [clears throat] we're we're we're in a an economy now which does seem to be cooling. Now, of course, the lack of data with the government closed down makes it a little tough to be precise on this, but uh it's interesting how many of the holes are are are filled that the lack of government data is being filled by private uh by private data and extensions. and u there haven't been any huge huge disruptions that make it entirely impossible to know where you are but I think if you look at the at the key factors um first of all [clears throat] you have uh weakening labor markets uh you you simply do not have new jobs being created uh layoffs are are not uh huge but new hirings are very very limited Uh so so you have a labor picture which is fairly fairly stagnant um at at at the present and that doesn't look like there's anything that's going to change that remarkably in the foreseeable future because uh businesses are very very cautious. They're concerned about uh concerned about demand for their products. They're concerned about inflation. uh they're very uh very uh very cautious right now. So uh does this mean we're in a recession or close to it? It could be. Uh a lot of this you don't really know until you're well into it. But but uh in in terms of the effects, I would say if we if we uh do get to resumption in government data and find that the economy is even weaker than uh than we believe, it wouldn't be at all surprising. Now, what does that what does that mean? Well, it means at some point there's got to be some u reflection in security markets. We haven't seen that yet. Uh we've had uh stocks which have continued to rise. Uh bonds in price have have been have been strong as well. Uh so there isn't a lot of reflection here to suggest that financial markets are accepting this is a very weak financial picture. uh but you would expect that to uh to to occur uh because you are dealing with uh inflated uh values of stocks. Uh we're we're dealing with an economy which is uh doesn't look nearly as strong as these security markets are suggesting. So, I think that we're probably going to, [clears throat] excuse me, wake up one of these days and find that things are really a lot more a lot weaker than we expect. And when that happens, u things could start to deteriorate in a hurry. >> You know, Dr. Schilling, as we are recording this, Fed Chair pal, he's giving his presser right now. They just had the um FOMC meeting. It's the end of October, Wednesday, October 9th, 29th. They cut rates. Um during the presser, he did signal that another rate cut in December is not a forego foregone conclusion and stocks pulled back or currently they've pulled back. We're not going to air this right away. So, just giving some context. Why why do you think the market seems so tied to whatever the Fed does or [laughter] >> Boy, I wish I knew. I think you're raising a very good question because there's a there seems to be u undue focus on what's happening with the Fed and and uh you know the Fed is reacts to what those guys see going on in the economy and financial markets. uh they're not [clears throat] they're not independent of of what they see and they've got pretty much the same data we do. Uh so I think there's there is always this attempt to find a couple of statistics that are going to explain it all and you don't have to worry about anything else. But that's that's usually over that's overdoing reliability on limited statistical evidence. Uh but I I I I do think that the Fed now is uh very concerned about the economy, concerned about what's going on with labor markets, uh what's what's going on with with the general uh health of of jobs in particular. And uh u I don't think I don't think that those guys are really uh looking on this with complete uh confidence that they know what's going on. uh and they obviously are trying to walk a a tight rope here and uh keep the economy uh above water uh but uh not not react too much to ongoing statistics which could be very different tomorrow than they are today. >> Do you think they're cutting um the 25 basis point cuts right now because they think a recession's on the horizon? Yeah, I I I I I think they do. They have uh they have been in effect telling us that uh that they think that the labor markets are are softening. Um and uh of course they they always worry about what they do today won't have its impact for uh weeks, months, even years. uh and and so they they always have to worry about what happens and the delayed effects. Um but but uh you know it it's it's a situation of where uh the economy doesn't react instantly to what the Fed does. So they have to always be concerned about that. >> This episode is brought to you by VANX Rare Earth and Strategic Metals ETF, ticker symbol REMX. Rare earths are the hidden backbone of modern technology and defense, powering everything from smartphones and electric vehicles to fighter jets and wind turbines. Van Ec recognized this early, launching the rare earth and strategic metals ETF, ticker symbol REMX, 15 years ago, well before supply chain security became a global priority. Today, China dominates the production and refining capacity of rare earths, creating real challenges for global supply chain security as these materials are essential for technological innovation, clean energy, and national security. That's why countries all around the world are racing to build their own supply chains and reduce reliance on China. As this global shift continues, [music] investment in the rare earth ecosystem is growing rapidly. From mining to advanced manufacturing, investors can gain access to this powerful trend through REMX. Visit vanck.com/remxjiulia to learn more. You know, you were mentioning earlier we are in a government shutdown. We're not getting that regular stream of data. You are looking elsewhere um getting data from the private sector. One of the things I admire about you, Dr. Schilling, is you're one of these people that's really good at kind of hiding finding these hidden vulnerabilities. Um, as an economist, what are you looking at right now when you don't have that regular data stream like from the government sector? Well, I'm looking at the same thing everybody else is, of course, but I'm I'm particularly concerned about the labor markets because u you don't have a lot of you don't have a lot of leeway there. Um you don't have people with huge excess assets. Um you've had very heavy borrowing. Uh student borrowing has come back with a vengeance and um and credit card borrowing. Uh so you so people are not dealing with a lot of uh a lot of slack if you will. Uh so it does mean that uh it does mean that there isn't a lot of of running room here and I think that that's one these guys at the Fed, you know, they're obviously looking at the same data we are and um I I think they're very concerned about that. So maybe it's that household balance sheet that's also worrisome then. >> Yeah, I think that's that's certainly an area that that I'm concentrating on is is what's happening to household balance sheets and and and and in other words, this isn't a situation where there's a lot of a lot of unused borrowing power, if you will. Um that's been pretty well exhausted. >> Yeah. Okay. On the labor market side, what are the other factors? It sounds like layoffs are a big deal. I know since the last time you and I spoke, we had that massive downward revision of 911,000 jobs. Um, it also kind of makes me wonder, is the BLS data even reliable anymore? I don't know if that's a relevant question still, but >> well, uh, that's an area that that I've been hammering home for years is the reliability of this data. And and one of the realities is that u at turning points the data is particularly unreliable and there's some very good reasons for that. Um, uh, when when the government collects data and that's true of the private sector data as well. uh they are looking for responses to surveys. Now when they ask people you know how many people did you hire this last month uh not everybody responds instantaneously. So they have to uh they have to base part of their current estimates on what they get back in surveys and part on an extension of past data uh to uh to make their estimates. Now, if everything is going uh in in in one direction or the other, in other words, if there's growth and in in jobs uh one way the one way or the other, then they can rely on on past data to give them a reasonably good read to fill in the gaps uh for responses that they don't yet get don't yet have. Um but if they if so it means that they they have to rely on uh on recent trends. Now if if uh if if the uh labor demand has been growing then those numbers are going to the past trends are going to be strong and that's going to tell them that they probably when they get the additional survey results they're going to find that the past trends are reliable. At turning points, that's not true at all. Because at turning points, what happens is that the past data is is no longer reliable and you and big shifts can happen. And so it's particularly uh problematic at turning points. Uh and and that's what happens, of course, when you get a when you get to a peak of the economy and you're going from uh big hiring to big firing. Uh that's that's of course the time you'd really like to know what's going on, but that's the time when you're least likely to have reliable data. And and this is a it's it's not the only force that is difficult to deal with at turning points, but it is an important one. and and it really does mean that uh when you're when you've had a a growing employment picture and it suddenly reverses, that's when you that's the time when you'd really like to have reliable data and that's the time when you're least likely to have reliable data. So, uh that that's uh that that's an issue that all of us trying to forecast uh these numbers have to deal with. >> Yeah. um when you see various headlines come out around the announced layoffs from big companies too like UPS, Amazon, I can name many others. When you start to see those big names come out, does that create an opportunity for more companies to be like, "Oh, okay. I can announce a layoff now because you're kind of in a bigger company, if you will, of other companies who are announcing similar. Yeah, I'll join I'll join the parade. I'm not gonna >> Yeah, like you don't want to be the only one, but when others do it, >> I'm not gonna look like the bad guy here. That's a very good point. Uh because I think it does give uh it does give companies an excuse to do what they really uh feel they should but are reluctant to do for public relations purposes or morale or whatever. Uh because if there is that if developing trend then then they feel that they're on on the safe side and they don't feel like they're standing out there like a sore thumb. Uh and when everybody else is saying, "Hey, what are you doing? You're you're a bad guy here." >> All right. Not to put you in this position, but the last time you and I spoke, you talked about how we could be recessionbound if we're not already in a recession. What where do you think the odds stand today if you could put a probability on it? >> Yeah, I I think there's probably uh maybe a 60% chance that we're uh we're in a recession or very close to it. I I think we've gotten to that point where we're going to see that uh particularly as the data comes in and the revisions and that is that's what's what I was referring to just a minute or two ago is the revisions because again if the if companies are late in reporting and the statistics are based on extension of past trends uh when the due date new data comes then that's when the turning points are really re revealed uh in full flower. So I I think that's that's that's that's a classic problem at turning points and it's true on the at bottoms as well as peaks. We're not dealing with bottoms now more likely than we are with peaks and employment. Uh so I I think this is the this is simply the reality of a statistical collection process. And then on the market side, we've had markets at record valuations. Like looking at the stock market, does it take a while for that to get recognized or priced in or it kind of feels like there's two economies out there? I'll read the comment section, Dr. Schilling, and people will say, "I'm in a recession." Or they're not feeling so great or they you talked to people are having trouble finding a job, especially people who have kids coming out of college right now. I heard that the job market for young people has been quite challenging. And then you have folks if you've benefited from the asset price increase. Your economy is great. >> Yeah, that that's a that's a good point. But uh the statistics particularly in retrospect after you get all the revisions in, they don't always reflect what seems to be the sentiment. You know, as you get you get times like now when a lot of people are very concerned about jobs availability and if they're parents, jobs for kids just coming out of school and so on. Uh that doesn't always end up being reflected in employment trends. Uh it would seem logical that that the sentiment has got a lot to do with what is turn is going to turn out to be reality when it's all recorded. But it isn't always that simple. I'm going to um share this again about you. I share it every time you come on. You are so adept at spotting bubbles and you've had some amazing calls. So, I'm going to tick through them for the folks watching listening. >> All right, let's go. the 1969-70 recession, the early 1970s inventory bubble, the 1973 to75 recession, the disinflation of the early 1980s, and you called the bond bull market bond rally of a lifetime. Um, you got the demise of Japan's 1980s bubble, the dot bubble, the housing bubble, and the financial bubble. the global financial crisis bubble. So, question for you. Are we in a bubble today? And what bubble are we in? >> Well, you're absolutely right. I've made kind of a career out of looking for bubbles, and I've had a reasonably good good luck in in spotting a number of them. Uh but what I've been really saying and writing about in our monthly newsletter insight, uh for the last couple of years, is I don't see any of these bubbles. And I think I can say that from a standpoint that I'm not the I'm not the polyiana type who always in effect dismisses any possible bubbles and saying, "Oh, well, it's just a momentary glitch." I just don't see that. In other words, there there isn't anything right now like the subprime mortgage excesses that we saw a decade ago where um everybody thought that they were going to make a absolute fortune out of houses and and buying them and leveraging them up and so on. I don't see anything like that. I don't think anything like the uh like the uh bubble that we had even even earlier in uh uh in uh uh uh subprime subprime stocks uh uh I'm sorry in in in uh in equities into into uh uh uh perennially weak stocks. I I don't I don't see anything like that. Now maybe it's there uh and you can look at things and say well hey how about uh how about what's going on now in the crypto area for example uh in in speculation. Yeah these are these are no question these are excesses but when you've got uh uh IA stocks you know selling at 30 40 times projected earnings and those earnings are pretty questionable to begin with. Uh you can say that's that that's a speculation and that could that could blow up. But those those things right now don't tend to involve huge swaths of the economy. It's not like again that the subprime housing bubble where everybody was involved. Uh so uh yeah I I you know there there could be some hidden bubbles here and as I say I've tried to make a career out of spot and they could be there but I just don't see anything that's big enough to give us a collapse in the economy. Nothing like the aftermath of the the subprime mortgages. Now, that doesn't mean you can't have a recession and have uh declines and you know, in a typical recession, for example, the S&P 500 declines peaked a trough about 30%. Well, no reason to expect that that wouldn't be the the case this time. Uh but say, is this going to be a 40 50% decline like we had with the demise of the uh of of the subprime stocks? I I just I just don't see the making of it. >> Let me ask you this, Dr. Schilling. I will have some guests who will say that the stock market is a bubble, that it's in a bubble. What are they what are they getting wrong? >> I'm not sure. [laughter] I mean, >> why I guess why isn't the stock market in a bubble then? >> Yeah. Well, there's you can always find accesses and and you can always assume that they are going to blow up and that the bubbles will uh will develop. Uh but uh uh you know I I I think there's you have to always put this in perspective and uh I'm not sure I'm not sure that that's a reasonable way of looking at things right now, but that's a judgment. >> Gold keeps setting new all-time highs, but price appreciation isn't the only way to profit from owning gold. Monetary Metals is redefining the future of precious metals investing. Instead of paying to store gold, imagine getting paid to own it. With monetary metals, you can earn up to 4% on your gold paid in physical gold. That's right. Your ounces grow each month, not just your paper balance. A yield on gold paid in gold means you're stacking more ounces every [music] single month. And you still benefit if gold's prices rise. You're earning more gold every month [music] and enjoying potential price appreciation at the same time. Go to monetary-metals.com/jullia to learn [music] more and see how you can start earning 4% on your gold paid in gold. Okay, let's turn to investing. Um, I think we've talked about some of the themes of the past. Correct me if I'm wrong, but still long dollar, long treasuries. What talk to me how you're thinking about this environment? >> Yeah, I I think so. I mean um in our in the funds that we manage and we are uh we are portfolio managers uh we are we have a what you'd call a riskoff approach and those are some of the things that you mentioned earlier uh we're we're long the dollar we're long treasuries or we're short commodities. uh it's a it's it's a portfolio that emphasizes what they call risk off uh that that that it it's not what you would see on the opposite side. In other words, we're not rampidly bullish on on uh stocks in general and and do stocks and uh and and the kind of speculative areas AI for example, which is the darling of the moment. Uh, we're on the other side. >> Risk off. Okay. But I believe you're agnostic on gold. Is that correct? >> I am. I am. >> Have you always been agnostic on? >> Yes. Well, I Yes, I I I I have actually. Uh [clears throat] and it goes way back um when gold was uh very much out of favor. Uh and this goes goes way way back uh decades. Um uh I mean gold went nowhere for 20 years and a lot of people thought that this was a place to be. And I I've just I've just never been able to come up with rationale for owning gold or being uh demonstrabably short gold because there's so many forces that can push gold prices around. Uh it can be uh it can be uh what's happening with political risks with military uncertainty. Uh it can be uh whether they're finding more gold reprocessing old gold tailings they call them what's left from previous mines. And uh what what's happened historically, I think, is that you've you've had long stretches of where gold prices have really gone nowhere for decades. And I think it's because a lot of these forces cancel each other out. Uh so I'm just saying, you know, I I guess I'm not smart enough to understand them all and put all the pieces together. So I just stay away from it. >> What's the case then for the dollar and being long the dollar? because I think um right now a lot of people are talking about the debasement trade. I guess that's why a lot of investors are going into gold. What is the case for the dollar? >> Well, um the dollar is the international currency. Uh it's it's the place that people go when there is great uncertainty in the world. And I think that's I think that's the case now. Uh and and it's it's it's there really isn't any alternative to the dollar. I mean, you look at the various other currencies and and you got to remember that if you're talking about owning the dollar or being short the dollar, you're always doing that against other currencies. They don't stand alone. There's always I'm I'm I'm short the dollar, but what's that mean? I'm long I'm long I'm long gold. I'm I'm long the yen. I'm long the Chinese yuan, whatever. uh but but right now I just I just don't think there are alternatives. Uh uh the dollar is 80 88% of all the world's uh transactions in goods and services and in and in uh uh and financial instruments is involves the dollar 88%. Uh so it's pretty hard to be uh to be negative on the dollar and and uh and of course you have you have uh uh all the other currencies and you look at them and say if you if you don't like the dollar what do you like? Now again, if you like gold, okay, fine. But if you're saying, "What other currencies?" Well, the euro, they're kind of in and out. And and it's not very clear that that's going to work out. You look at various alternatives. The euro problems there. France, France right now stand out, [clears throat] that doesn't look so hot. U the Chinese, they'd like their wand to be an international currency. uh but they want to control it and and uh currencies uh traders do not like uh currencies that are controlled. They want freely freely tradable currencies. So you don't look to the Chinese yuan u the yen Japanese don't want their currency to be a a world currency. uh you know you run through the list pretty fast and you really just come come out with the reality that there isn't a uh alternative and a lot of this is uh also backs up to the idea that the US is the world's biggest economy. Uh it's it's got the uh it's it's got the uh uh greatest involvement in in trade and economic growth in security markets uh in economic expansion. U you know it's really kind of a question what's the alternative and there really isn't isn't any from my judgment. >> I want to bring up um the US's fiscal picture with you. We have US debt that is now north of 38 trillion. You've written about this concept of the debt bomb which I would love to explore with you. But how do you what do you make of our fiscal picture? Well, again it's it's a um it's a question where there is been a huge expansion in in debt and particularly in the US but throughout throughout the world and it's a it's a uh a situation of where uh there's tremendous borrowing particularly by countries central banks and so on. uh and uh uh this this debt is being created and you sort of have this gut feeling this can't continue forever. Uh but what's what's going to happen eventually? Uh that that's that's the question. What's going to happen? And and I've I've developed some years ago this idea of a debt bomb. And that is the idea that that the debt led by what's happening in in government debt and in this country of course it's it's a federal government debt treasuries and you sort of say you know what what's going to happen when you get to the point where u people just aren't willing to accept that debt. Uh well that's that's a that's kind of a scary scenario because then you say what what would they accept? They don't want they don't want government securities. What do they want? Of course this is where the gold the gold devotees would say oh I know the answer to that. They want gold. Uh but there isn't enough gold around in the world to really replace uh government securities on any meaningful basis. So uh there is a there is this question of what happens with this huge debt expansion and uh uh we've had this going on for years even decades and I I'm concerned because there doesn't seem to be any uh logical uh uh uh terminus to this huge expansion in in in debt and particularly particularly government debt. Uh but um it keeps going >> until it reaches a point where I guess it can't, right? >> Yeah. Yeah. But then you say what happens? I don't know. >> I don't know either. But it is a bit worrisome. Dr. Schilling, before I let you go, and I have to say I always love talking to you. I love listening to you and I love learning from you. >> Oh, thanks. >> What is What is something that's keeping you up at night? It doesn't actually have to be keeping you up at night, but [laughter] that what is something that's really worrying you these days that is keeping you up at night? And then to counter that question, what is something that's making you hopeful? >> Okay. Well, uh I think in terms of of the problems, um you know, I I am concerned with the tremendous accumulation of debt and the uh lack of of concern about it. It isn't the debt per se. It's it's the fact that there aren't any real big worries about it on the part of governments and and the idea of continual borrowing. Boy, you would you would think that at some point uh that governments and and financial markets and the public would be concerned about it, but nobody seems to seems to be. And the fact that debt can be continued issued without any great concern, you know. I don't know. I guess I'm I'm uh too much of a bure puritan to accept that as a as a a continual uh continual pattern which will will be there forever. Uh but on the other side of the coin um I'm very uh I I'm very uh impressed with the US economy. Uh it's it's a it's the biggest strongest economy in the world and it does continue to chug along. Uh it doesn't mean there isn't a crisis out there at some point, but uh I don't I just don't see it. And I I think that we're dealing with uh an economy and you you look at what's happened just in the last uh well so far this year with the with the Trump uh with the with the Trump presidency. And you know a lot of things there I think if we were in a vacuum and you describe what had happened boy you'd say this is terrible things are going to collapse and they haven't. Uh there were you know there were tremendous worries with the new with the second Trump presidency with u uh with tariffs that were going to that were going to kill things that were going to create tremendous inflation. Well, we had actually, and you might recall some of our earlier conversations, we really said we didn't think the tariffs were going to turn out to be that bad because there were going to be offsetting actions that that buyers and sellers, borrowers, and lenders are going to adapt to that. And I think so far that's what's that's what's been happening. Um, so I'm I'm I continue to be impressed impressed with the adaptability of not only the US economy but the economies around the world to some circumstances that you would think going in uh would be absolutely disastrous. Uh so I I that that's the that's the good news is the adapt adaptability of the US and other economies throughout the world. >> You're right. I didn't bring up I did not bring up tariffs with you. We talked about it six months ago. >> I'm sure >> what is uh we did we didn't discuss tariffs this time. We talked about it six months ago. >> Well, you know and and that is interesting that we didn't I mean that >> Yeah. What do you have another like point of view now? I mean again if 6 months ago uh the tariff issue was going to be an end of the world and it and it hasn't been and you're getting the adaptability and it doesn't mean it isn't going to be disruptive. Uh but you look at what's happening is there is there great evidence that that these tariffs are really wrecking uh the major economies of the world or even the even the minor ones? Not so far. there's been adaptability and that's that's the thing that that I think um a lot of people miss is the adaptability of of of economies around the world. I mean you got these you get these tariffs and and and what happens? Well, you see a lot of businesses that u they cut their costs, they find alternative suppliers, alternative uh vendors. Uh it's it's it's uh you know it's very easy to say when you get a disruption like tariffs that it's really going to be uh it's it's going to be terrible and that's the easy conclusion. uh what what's what's tough to deal with is to say now wait a minute let's talk about all the ways in which the economy adapts to this and and what happens and that's what's that's what's harder to to figure out and to delineate but that's what's been happening so far so um I I think you have to you have to take a deep breath and not get carried away by the latest feds of the moment >> well Dr. Shilling, before I let you go, let folks know where they can find and support your work. Subscribe to your insight newsletter, your a Gary Schilling's insight. It's a monthly newsletter. I think you have a phone number. We'll plug that in the notes here. [laughter] >> And then any parting thoughts, anything that you'd like this audience to think about before you go? Well, you can leave them that. >> I I think you have to be um you have to be very cautious about the fads of the moment. And I don't mean to be a polyiana on this and I I don't think I have. I think I've been more and more concerned with with bubbles and disruptions and a lot of forecasters, but I do think you have to uh you have to look at this in in perspective and that's what we try to do our monthly newsletter and uh it's called insight and u if people would like to see uh we just came out with our November issues as a matter of fact and if people uh if people would like to see a complimentary copy uh They can visit our website and that's www.aggaryshilling.com. a garyshilling all one word.com or they can give us a a uh a toll-free call number and the uh the number is 1888 3467444 and we'd be happy to send you one and you might want to describe you might want to subscribe to it. Dr. Gary Schilling, thank you so much for being so generous with all of your time, your knowledge, your wisdom, helping all of us learn and get better. Really appreciate you and wonderful to see you as always, Dr. Schilling. Thanks again. >> Same here. Thanks a lot. Bye.
Dr. Gary Shilling: Labor Markets Weakening, Recession Concerns & Why Markets May Wake Up Soon
Summary
Transcript
I think there's probably uh maybe a 60% chance that we're that we're in a recession or very close to it. Uh when the due date new data comes in, that's when the turning points are really revealed uh in full flower. So I think this is the this is simply the reality of a statistical collection process. >> Dr. Gary Schilling, president of a Gary Schilling and Co. an economics consulting firm and a registered investment adviser. It is so wonderful to welcome you back to the show. Great to see you as always, Dr. Schilling. Really appreciate you taking the time. >> Glad to be back. Glad to be back. >> Wonderful to have you as always. The last time we had you on, Dr. Schilling. It was in April, right after Liberation Day. It's been just over six months. I feel like so much has happened in that time. So it would be wonderful to just start with the big picture where we always start that big picture macro view. What is on your radar right now as it relates to the economy and the markets? How are you thinking about the world? Um and as you know, Dr. Schilling, you can take all the time you need to set the table when it comes to that big picture view. >> Okay. Well, uh, [clears throat] we're we're we're in a an economy now which does seem to be cooling. Now, of course, the lack of data with the government closed down makes it a little tough to be precise on this, but uh it's interesting how many of the holes are are are filled that the lack of government data is being filled by private uh by private data and extensions. and u there haven't been any huge huge disruptions that make it entirely impossible to know where you are but I think if you look at the at the key factors um first of all [clears throat] you have uh weakening labor markets uh you you simply do not have new jobs being created uh layoffs are are not uh huge but new hirings are very very limited Uh so so you have a labor picture which is fairly fairly stagnant um at at at the present and that doesn't look like there's anything that's going to change that remarkably in the foreseeable future because uh businesses are very very cautious. They're concerned about uh concerned about demand for their products. They're concerned about inflation. uh they're very uh very uh very cautious right now. So uh does this mean we're in a recession or close to it? It could be. Uh a lot of this you don't really know until you're well into it. But but uh in in terms of the effects, I would say if we if we uh do get to resumption in government data and find that the economy is even weaker than uh than we believe, it wouldn't be at all surprising. Now, what does that what does that mean? Well, it means at some point there's got to be some u reflection in security markets. We haven't seen that yet. Uh we've had uh stocks which have continued to rise. Uh bonds in price have have been have been strong as well. Uh so there isn't a lot of reflection here to suggest that financial markets are accepting this is a very weak financial picture. uh but you would expect that to uh to to occur uh because you are dealing with uh inflated uh values of stocks. Uh we're we're dealing with an economy which is uh doesn't look nearly as strong as these security markets are suggesting. So, I think that we're probably going to, [clears throat] excuse me, wake up one of these days and find that things are really a lot more a lot weaker than we expect. And when that happens, u things could start to deteriorate in a hurry. >> You know, Dr. Schilling, as we are recording this, Fed Chair pal, he's giving his presser right now. They just had the um FOMC meeting. It's the end of October, Wednesday, October 9th, 29th. They cut rates. Um during the presser, he did signal that another rate cut in December is not a forego foregone conclusion and stocks pulled back or currently they've pulled back. We're not going to air this right away. So, just giving some context. Why why do you think the market seems so tied to whatever the Fed does or [laughter] >> Boy, I wish I knew. I think you're raising a very good question because there's a there seems to be u undue focus on what's happening with the Fed and and uh you know the Fed is reacts to what those guys see going on in the economy and financial markets. uh they're not [clears throat] they're not independent of of what they see and they've got pretty much the same data we do. Uh so I think there's there is always this attempt to find a couple of statistics that are going to explain it all and you don't have to worry about anything else. But that's that's usually over that's overdoing reliability on limited statistical evidence. Uh but I I I I do think that the Fed now is uh very concerned about the economy, concerned about what's going on with labor markets, uh what's what's going on with with the general uh health of of jobs in particular. And uh u I don't think I don't think that those guys are really uh looking on this with complete uh confidence that they know what's going on. uh and they obviously are trying to walk a a tight rope here and uh keep the economy uh above water uh but uh not not react too much to ongoing statistics which could be very different tomorrow than they are today. >> Do you think they're cutting um the 25 basis point cuts right now because they think a recession's on the horizon? Yeah, I I I I I think they do. They have uh they have been in effect telling us that uh that they think that the labor markets are are softening. Um and uh of course they they always worry about what they do today won't have its impact for uh weeks, months, even years. uh and and so they they always have to worry about what happens and the delayed effects. Um but but uh you know it it's it's a situation of where uh the economy doesn't react instantly to what the Fed does. 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From mining to advanced manufacturing, investors can gain access to this powerful trend through REMX. Visit vanck.com/remxjiulia to learn more. You know, you were mentioning earlier we are in a government shutdown. We're not getting that regular stream of data. You are looking elsewhere um getting data from the private sector. One of the things I admire about you, Dr. Schilling, is you're one of these people that's really good at kind of hiding finding these hidden vulnerabilities. Um, as an economist, what are you looking at right now when you don't have that regular data stream like from the government sector? Well, I'm looking at the same thing everybody else is, of course, but I'm I'm particularly concerned about the labor markets because u you don't have a lot of you don't have a lot of leeway there. Um you don't have people with huge excess assets. Um you've had very heavy borrowing. Uh student borrowing has come back with a vengeance and um and credit card borrowing. Uh so you so people are not dealing with a lot of uh a lot of slack if you will. Uh so it does mean that uh it does mean that there isn't a lot of of running room here and I think that that's one these guys at the Fed, you know, they're obviously looking at the same data we are and um I I think they're very concerned about that. So maybe it's that household balance sheet that's also worrisome then. >> Yeah, I think that's that's certainly an area that that I'm concentrating on is is what's happening to household balance sheets and and and and in other words, this isn't a situation where there's a lot of a lot of unused borrowing power, if you will. Um that's been pretty well exhausted. >> Yeah. Okay. On the labor market side, what are the other factors? It sounds like layoffs are a big deal. I know since the last time you and I spoke, we had that massive downward revision of 911,000 jobs. Um, it also kind of makes me wonder, is the BLS data even reliable anymore? I don't know if that's a relevant question still, but >> well, uh, that's an area that that I've been hammering home for years is the reliability of this data. And and one of the realities is that u at turning points the data is particularly unreliable and there's some very good reasons for that. Um, uh, when when the government collects data and that's true of the private sector data as well. uh they are looking for responses to surveys. Now when they ask people you know how many people did you hire this last month uh not everybody responds instantaneously. So they have to uh they have to base part of their current estimates on what they get back in surveys and part on an extension of past data uh to uh to make their estimates. Now, if everything is going uh in in in one direction or the other, in other words, if there's growth and in in jobs uh one way the one way or the other, then they can rely on on past data to give them a reasonably good read to fill in the gaps uh for responses that they don't yet get don't yet have. Um but if they if so it means that they they have to rely on uh on recent trends. Now if if uh if if the uh labor demand has been growing then those numbers are going to the past trends are going to be strong and that's going to tell them that they probably when they get the additional survey results they're going to find that the past trends are reliable. At turning points, that's not true at all. Because at turning points, what happens is that the past data is is no longer reliable and you and big shifts can happen. And so it's particularly uh problematic at turning points. Uh and and that's what happens, of course, when you get a when you get to a peak of the economy and you're going from uh big hiring to big firing. Uh that's that's of course the time you'd really like to know what's going on, but that's the time when you're least likely to have reliable data. And and this is a it's it's not the only force that is difficult to deal with at turning points, but it is an important one. and and it really does mean that uh when you're when you've had a a growing employment picture and it suddenly reverses, that's when you that's the time when you'd really like to have reliable data and that's the time when you're least likely to have reliable data. So, uh that that's uh that that's an issue that all of us trying to forecast uh these numbers have to deal with. >> Yeah. um when you see various headlines come out around the announced layoffs from big companies too like UPS, Amazon, I can name many others. When you start to see those big names come out, does that create an opportunity for more companies to be like, "Oh, okay. I can announce a layoff now because you're kind of in a bigger company, if you will, of other companies who are announcing similar. Yeah, I'll join I'll join the parade. I'm not gonna >> Yeah, like you don't want to be the only one, but when others do it, >> I'm not gonna look like the bad guy here. That's a very good point. Uh because I think it does give uh it does give companies an excuse to do what they really uh feel they should but are reluctant to do for public relations purposes or morale or whatever. Uh because if there is that if developing trend then then they feel that they're on on the safe side and they don't feel like they're standing out there like a sore thumb. Uh and when everybody else is saying, "Hey, what are you doing? You're you're a bad guy here." >> All right. Not to put you in this position, but the last time you and I spoke, you talked about how we could be recessionbound if we're not already in a recession. What where do you think the odds stand today if you could put a probability on it? >> Yeah, I I think there's probably uh maybe a 60% chance that we're uh we're in a recession or very close to it. I I think we've gotten to that point where we're going to see that uh particularly as the data comes in and the revisions and that is that's what's what I was referring to just a minute or two ago is the revisions because again if the if companies are late in reporting and the statistics are based on extension of past trends uh when the due date new data comes then that's when the turning points are really re revealed uh in full flower. So I I think that's that's that's that's a classic problem at turning points and it's true on the at bottoms as well as peaks. We're not dealing with bottoms now more likely than we are with peaks and employment. Uh so I I think this is the this is simply the reality of a statistical collection process. And then on the market side, we've had markets at record valuations. Like looking at the stock market, does it take a while for that to get recognized or priced in or it kind of feels like there's two economies out there? I'll read the comment section, Dr. Schilling, and people will say, "I'm in a recession." Or they're not feeling so great or they you talked to people are having trouble finding a job, especially people who have kids coming out of college right now. I heard that the job market for young people has been quite challenging. And then you have folks if you've benefited from the asset price increase. Your economy is great. >> Yeah, that that's a that's a good point. But uh the statistics particularly in retrospect after you get all the revisions in, they don't always reflect what seems to be the sentiment. You know, as you get you get times like now when a lot of people are very concerned about jobs availability and if they're parents, jobs for kids just coming out of school and so on. Uh that doesn't always end up being reflected in employment trends. Uh it would seem logical that that the sentiment has got a lot to do with what is turn is going to turn out to be reality when it's all recorded. But it isn't always that simple. I'm going to um share this again about you. I share it every time you come on. You are so adept at spotting bubbles and you've had some amazing calls. So, I'm going to tick through them for the folks watching listening. >> All right, let's go. the 1969-70 recession, the early 1970s inventory bubble, the 1973 to75 recession, the disinflation of the early 1980s, and you called the bond bull market bond rally of a lifetime. Um, you got the demise of Japan's 1980s bubble, the dot bubble, the housing bubble, and the financial bubble. the global financial crisis bubble. So, question for you. Are we in a bubble today? And what bubble are we in? >> Well, you're absolutely right. I've made kind of a career out of looking for bubbles, and I've had a reasonably good good luck in in spotting a number of them. Uh but what I've been really saying and writing about in our monthly newsletter insight, uh for the last couple of years, is I don't see any of these bubbles. And I think I can say that from a standpoint that I'm not the I'm not the polyiana type who always in effect dismisses any possible bubbles and saying, "Oh, well, it's just a momentary glitch." I just don't see that. In other words, there there isn't anything right now like the subprime mortgage excesses that we saw a decade ago where um everybody thought that they were going to make a absolute fortune out of houses and and buying them and leveraging them up and so on. I don't see anything like that. I don't think anything like the uh like the uh bubble that we had even even earlier in uh uh in uh uh uh subprime subprime stocks uh uh I'm sorry in in in uh in equities into into uh uh uh perennially weak stocks. I I don't I don't see anything like that. Now maybe it's there uh and you can look at things and say well hey how about uh how about what's going on now in the crypto area for example uh in in speculation. Yeah these are these are no question these are excesses but when you've got uh uh IA stocks you know selling at 30 40 times projected earnings and those earnings are pretty questionable to begin with. Uh you can say that's that that's a speculation and that could that could blow up. But those those things right now don't tend to involve huge swaths of the economy. It's not like again that the subprime housing bubble where everybody was involved. Uh so uh yeah I I you know there there could be some hidden bubbles here and as I say I've tried to make a career out of spot and they could be there but I just don't see anything that's big enough to give us a collapse in the economy. Nothing like the aftermath of the the subprime mortgages. Now, that doesn't mean you can't have a recession and have uh declines and you know, in a typical recession, for example, the S&P 500 declines peaked a trough about 30%. Well, no reason to expect that that wouldn't be the the case this time. Uh but say, is this going to be a 40 50% decline like we had with the demise of the uh of of the subprime stocks? I I just I just don't see the making of it. >> Let me ask you this, Dr. Schilling. I will have some guests who will say that the stock market is a bubble, that it's in a bubble. What are they what are they getting wrong? >> I'm not sure. [laughter] I mean, >> why I guess why isn't the stock market in a bubble then? >> Yeah. Well, there's you can always find accesses and and you can always assume that they are going to blow up and that the bubbles will uh will develop. Uh but uh uh you know I I I think there's you have to always put this in perspective and uh I'm not sure I'm not sure that that's a reasonable way of looking at things right now, but that's a judgment. >> Gold keeps setting new all-time highs, but price appreciation isn't the only way to profit from owning gold. Monetary Metals is redefining the future of precious metals investing. Instead of paying to store gold, imagine getting paid to own it. With monetary metals, you can earn up to 4% on your gold paid in physical gold. That's right. Your ounces grow each month, not just your paper balance. A yield on gold paid in gold means you're stacking more ounces every [music] single month. And you still benefit if gold's prices rise. You're earning more gold every month [music] and enjoying potential price appreciation at the same time. Go to monetary-metals.com/jullia to learn [music] more and see how you can start earning 4% on your gold paid in gold. Okay, let's turn to investing. Um, I think we've talked about some of the themes of the past. Correct me if I'm wrong, but still long dollar, long treasuries. What talk to me how you're thinking about this environment? >> Yeah, I I think so. I mean um in our in the funds that we manage and we are uh we are portfolio managers uh we are we have a what you'd call a riskoff approach and those are some of the things that you mentioned earlier uh we're we're long the dollar we're long treasuries or we're short commodities. uh it's a it's it's a portfolio that emphasizes what they call risk off uh that that that it it's not what you would see on the opposite side. In other words, we're not rampidly bullish on on uh stocks in general and and do stocks and uh and and the kind of speculative areas AI for example, which is the darling of the moment. Uh, we're on the other side. >> Risk off. Okay. But I believe you're agnostic on gold. Is that correct? >> I am. I am. >> Have you always been agnostic on? >> Yes. Well, I Yes, I I I I have actually. Uh [clears throat] and it goes way back um when gold was uh very much out of favor. Uh and this goes goes way way back uh decades. Um uh I mean gold went nowhere for 20 years and a lot of people thought that this was a place to be. And I I've just I've just never been able to come up with rationale for owning gold or being uh demonstrabably short gold because there's so many forces that can push gold prices around. Uh it can be uh it can be uh what's happening with political risks with military uncertainty. Uh it can be uh whether they're finding more gold reprocessing old gold tailings they call them what's left from previous mines. And uh what what's happened historically, I think, is that you've you've had long stretches of where gold prices have really gone nowhere for decades. And I think it's because a lot of these forces cancel each other out. Uh so I'm just saying, you know, I I guess I'm not smart enough to understand them all and put all the pieces together. So I just stay away from it. >> What's the case then for the dollar and being long the dollar? because I think um right now a lot of people are talking about the debasement trade. I guess that's why a lot of investors are going into gold. What is the case for the dollar? >> Well, um the dollar is the international currency. Uh it's it's the place that people go when there is great uncertainty in the world. And I think that's I think that's the case now. Uh and and it's it's it's there really isn't any alternative to the dollar. I mean, you look at the various other currencies and and you got to remember that if you're talking about owning the dollar or being short the dollar, you're always doing that against other currencies. They don't stand alone. There's always I'm I'm I'm short the dollar, but what's that mean? I'm long I'm long I'm long gold. I'm I'm long the yen. I'm long the Chinese yuan, whatever. uh but but right now I just I just don't think there are alternatives. Uh uh the dollar is 80 88% of all the world's uh transactions in goods and services and in and in uh uh and financial instruments is involves the dollar 88%. Uh so it's pretty hard to be uh to be negative on the dollar and and uh and of course you have you have uh uh all the other currencies and you look at them and say if you if you don't like the dollar what do you like? Now again, if you like gold, okay, fine. But if you're saying, "What other currencies?" Well, the euro, they're kind of in and out. And and it's not very clear that that's going to work out. You look at various alternatives. The euro problems there. France, France right now stand out, [clears throat] that doesn't look so hot. U the Chinese, they'd like their wand to be an international currency. uh but they want to control it and and uh currencies uh traders do not like uh currencies that are controlled. They want freely freely tradable currencies. So you don't look to the Chinese yuan u the yen Japanese don't want their currency to be a a world currency. uh you know you run through the list pretty fast and you really just come come out with the reality that there isn't a uh alternative and a lot of this is uh also backs up to the idea that the US is the world's biggest economy. Uh it's it's got the uh it's it's got the uh uh greatest involvement in in trade and economic growth in security markets uh in economic expansion. U you know it's really kind of a question what's the alternative and there really isn't isn't any from my judgment. >> I want to bring up um the US's fiscal picture with you. We have US debt that is now north of 38 trillion. You've written about this concept of the debt bomb which I would love to explore with you. But how do you what do you make of our fiscal picture? Well, again it's it's a um it's a question where there is been a huge expansion in in debt and particularly in the US but throughout throughout the world and it's a it's a uh a situation of where uh there's tremendous borrowing particularly by countries central banks and so on. uh and uh uh this this debt is being created and you sort of have this gut feeling this can't continue forever. Uh but what's what's going to happen eventually? Uh that that's that's the question. What's going to happen? And and I've I've developed some years ago this idea of a debt bomb. And that is the idea that that the debt led by what's happening in in government debt and in this country of course it's it's a federal government debt treasuries and you sort of say you know what what's going to happen when you get to the point where u people just aren't willing to accept that debt. Uh well that's that's a that's kind of a scary scenario because then you say what what would they accept? They don't want they don't want government securities. What do they want? Of course this is where the gold the gold devotees would say oh I know the answer to that. They want gold. Uh but there isn't enough gold around in the world to really replace uh government securities on any meaningful basis. So uh there is a there is this question of what happens with this huge debt expansion and uh uh we've had this going on for years even decades and I I'm concerned because there doesn't seem to be any uh logical uh uh uh terminus to this huge expansion in in in debt and particularly particularly government debt. Uh but um it keeps going >> until it reaches a point where I guess it can't, right? >> Yeah. Yeah. But then you say what happens? I don't know. >> I don't know either. But it is a bit worrisome. Dr. Schilling, before I let you go, and I have to say I always love talking to you. I love listening to you and I love learning from you. >> Oh, thanks. >> What is What is something that's keeping you up at night? It doesn't actually have to be keeping you up at night, but [laughter] that what is something that's really worrying you these days that is keeping you up at night? And then to counter that question, what is something that's making you hopeful? >> Okay. Well, uh I think in terms of of the problems, um you know, I I am concerned with the tremendous accumulation of debt and the uh lack of of concern about it. It isn't the debt per se. It's it's the fact that there aren't any real big worries about it on the part of governments and and the idea of continual borrowing. Boy, you would you would think that at some point uh that governments and and financial markets and the public would be concerned about it, but nobody seems to seems to be. And the fact that debt can be continued issued without any great concern, you know. I don't know. I guess I'm I'm uh too much of a bure puritan to accept that as a as a a continual uh continual pattern which will will be there forever. Uh but on the other side of the coin um I'm very uh I I'm very uh impressed with the US economy. Uh it's it's a it's the biggest strongest economy in the world and it does continue to chug along. Uh it doesn't mean there isn't a crisis out there at some point, but uh I don't I just don't see it. And I I think that we're dealing with uh an economy and you you look at what's happened just in the last uh well so far this year with the with the Trump uh with the with the Trump presidency. And you know a lot of things there I think if we were in a vacuum and you describe what had happened boy you'd say this is terrible things are going to collapse and they haven't. Uh there were you know there were tremendous worries with the new with the second Trump presidency with u uh with tariffs that were going to that were going to kill things that were going to create tremendous inflation. Well, we had actually, and you might recall some of our earlier conversations, we really said we didn't think the tariffs were going to turn out to be that bad because there were going to be offsetting actions that that buyers and sellers, borrowers, and lenders are going to adapt to that. And I think so far that's what's that's what's been happening. Um, so I'm I'm I continue to be impressed impressed with the adaptability of not only the US economy but the economies around the world to some circumstances that you would think going in uh would be absolutely disastrous. Uh so I I that that's the that's the good news is the adapt adaptability of the US and other economies throughout the world. >> You're right. I didn't bring up I did not bring up tariffs with you. We talked about it six months ago. >> I'm sure >> what is uh we did we didn't discuss tariffs this time. We talked about it six months ago. >> Well, you know and and that is interesting that we didn't I mean that >> Yeah. What do you have another like point of view now? I mean again if 6 months ago uh the tariff issue was going to be an end of the world and it and it hasn't been and you're getting the adaptability and it doesn't mean it isn't going to be disruptive. Uh but you look at what's happening is there is there great evidence that that these tariffs are really wrecking uh the major economies of the world or even the even the minor ones? Not so far. there's been adaptability and that's that's the thing that that I think um a lot of people miss is the adaptability of of of economies around the world. I mean you got these you get these tariffs and and and what happens? Well, you see a lot of businesses that u they cut their costs, they find alternative suppliers, alternative uh vendors. Uh it's it's it's uh you know it's very easy to say when you get a disruption like tariffs that it's really going to be uh it's it's going to be terrible and that's the easy conclusion. uh what what's what's tough to deal with is to say now wait a minute let's talk about all the ways in which the economy adapts to this and and what happens and that's what's that's what's harder to to figure out and to delineate but that's what's been happening so far so um I I think you have to you have to take a deep breath and not get carried away by the latest feds of the moment >> well Dr. Shilling, before I let you go, let folks know where they can find and support your work. Subscribe to your insight newsletter, your a Gary Schilling's insight. It's a monthly newsletter. I think you have a phone number. We'll plug that in the notes here. [laughter] >> And then any parting thoughts, anything that you'd like this audience to think about before you go? Well, you can leave them that. >> I I think you have to be um you have to be very cautious about the fads of the moment. And I don't mean to be a polyiana on this and I I don't think I have. I think I've been more and more concerned with with bubbles and disruptions and a lot of forecasters, but I do think you have to uh you have to look at this in in perspective and that's what we try to do our monthly newsletter and uh it's called insight and u if people would like to see uh we just came out with our November issues as a matter of fact and if people uh if people would like to see a complimentary copy uh They can visit our website and that's www.aggaryshilling.com. a garyshilling all one word.com or they can give us a a uh a toll-free call number and the uh the number is 1888 3467444 and we'd be happy to send you one and you might want to describe you might want to subscribe to it. Dr. Gary Schilling, thank you so much for being so generous with all of your time, your knowledge, your wisdom, helping all of us learn and get better. Really appreciate you and wonderful to see you as always, Dr. Schilling. Thanks again. >> Same here. Thanks a lot. Bye.