ED HARRISON: Welcome to Investment Ideas. I'm your host, Ed Harrison, and I'm talking to Gary Shilling, who is the founder and president, I believe it is, of the economic consultancy and the investment advisors of the same name. I really screwed that up, Gary. Maybe you can tell us what the answer is.
GARY SHILLING: Well, yeah, we're registered investment advisors and economic consultants. We also publish a newsletter. So we pretty much cover the waterfront from the top down on the economy, starting with the economy and getting down to the investment strategy.
ED HARRISON: Well, we've spoken before, but I think this is a good time to mention the fact that you have the monthly newsletter, the Insight newsletter, which you've been doing for quite a long time. Let me just give you a little bit of a plug because people can get to it at AGaryShilling.com. They can also find it at 888-346-7444. So that's a bit old school, in terms of the telephone number.
The reason I mention that, Gary, is, again, you've been doing this independent research, one of the best out there for a long time. How long have you been in the business?
GARY SHILLING: Yeah, well, we started up the firm in 1978, and we've been publishing the newsletter pretty much the whole time. And if people are interested, we'd be happy to send them a complimentary copy if they just give us a call or an email. They can see for themselves what kind of things we do.
ED HARRISON: Excellent. So yeah, that number, again, and then also AGaryHarrison.com, they can get in touch with you. Now, Gary, I want to talk to you about your investment thesis. This is Investment Ideas, so that's why we're talking about this.
But to get there, you're an economist by trade. We want to go through the economics first, what the economic situation is and what your projections are going forward, just to give people a sense. We're going to get to you're long Treasuries, you're short the dollar, short equities. But we're going to talk about how we get to that position.
GARY SHILLING: OK, fine.
ED HARRISON: So Gary, the way that I'm going to frame this is the long, cold, dark winter. That's where we're headed right now. We're actually in the middle of this. I mean, when we're taping this, literally, the last two days of COVID-19 deaths were the highest ever in the United States. And that would suggest that, indeed, bad things are happening as we speak, and that portends, potentially, very bad things for this entire winter. Is it a stretch for me to put it that way, or are you seeing things differently than I am?
GARY SHILLING: Well, I think it's going to be long and dark. We'll see whether it's cold. We have had warmer weather in the last few winters.
But no, I think it is going to take a long time because the vaccines that are being developed, they are moving ahead rapidly on them. But by the time they get them fully distributed and tested and people trust them-- that's very important, that people and governments trust them-- I think we're probably going to be pretty much a year from now before that whole thing is working. So long, cold, dark winter, but maybe you throw in spring and summer as well, unfortunately.
ED HARRISON: Yeah. So what does that mean? That's the question, in terms of what that means for the economy and also in terms of tiding us over. First, I want to talk about what it means for the economy.
I'll give you an example. Two days ago, I went to my pick up my bike because it was at the bike shop being fixed. And I also wanted to get a space heater because we're having problems with our heating system here in the house, in the basement where I've been trapped for the last nine months. And there was no one there, Gary.
We saw restaurants. We went to the Macy's. I went to the Target, to a whole mall. I saw the movie theaters. No one was there. Is that how it's going to be until this vaccine?
GARY SHILLING: I think it is. I mean, the reality is that it's the physical proximity that spreads the virus. And we've had this repeated attempt by governments and by business interests to reopen business, reopen the economy. But every time they do, you get a new wave of infections in the US, even worse in Europe, and then they've got to close things back down again. And it's obviously a very frustrating situation for politicians and businesses and so on, but that's the reality, that this virus just doesn't go away on its own.
So I think we are going to see repeated closings. And now they keep arguing about schools in various areas of New York, whether they're going to open or not. I was just talking to some people actually at University of the South-- Sewanee, Tennessee-- and whether they're going to have classes face to face. I talked to another guy at Stanford, where I got a PhD years ago, and they're deciding whether they're going to have physical presence.
So a lot of the aspects of the economy are really closed down. And it's not only disruptive, but it's very disconcerting. Nobody knows what to expect.
ED HARRISON: Yeah, let's put some numbers to that because today, we came out with the unemployment report, the jobs report, and it was a pretty big miss on the headline number. Non-farm payrolls were 245,000 added. The unemployment rate went down to 6.7% instead of 6.8%, but the expectation was for 469,000 jobs. And we also had 638,000 jobs that were added to the economy in the month prior, in October.
And really, we still have 9.8 million jobs to make up that we've lost since February, still almost 10 million jobs short. So 245,000 jobs isn't a lot in that context. What does that mean, just numerically, in terms of the growth expectations you have? Can you put some meat on the bones, in terms of what your expectations are for the employment market as well?
GARY SHILLING: Well, first of all, the unemployment rate, the only reason it can go down is because people drop out of the labor force, they're not counted. So it's irrelevant. But you did have a very weak payroll employments.
And what was interesting, when you tear apart the numbers, is the jobs that are being created are pretty much the stay-at-home economy-- warehousing, delivery. So it's the Amazon effect, if you will. And those are the winners. The losers are retail trade, the bricks-and-mortar kind of establishments and so on.
And so you have this tremendous differentiation. People are buying furniture. They're buying more electronic gadgets for home. A lot of the FANGs have benefited from this.
But then you look at the rest of the economy, and it's really a pretty sad shape. And those employment numbers gave you a very clear indication of that. That was November. There's no reason to think it's going to get any better. In coming months, it probably may be worse.
I had a reporter call me this morning and ask, could we see a negative number for December, in terms of payrolls? And I said, it's certainly possible. If you look at the trend where it's been declining, the rate of increase has been declining for months, you very well go negative in December.
ED HARRISON: Yeah, and actually, I saw that Justin Wolfers, he was mentioning this. He said that the household survey suggested that employment actually declined by 74k last month, if you look at the household survey versus what the establishment survey said. Maybe it's because they didn't get to all the establishments.
GARY SHILLING: Yeah. Well, those are two different surveys. The establishment survey, of course, is actually polling establishments, how many people on your payroll? That's pretty straightforward.
The household survey is really an answer to questions that are posed to households. And they're saying, are you at work? OK, fine, then you're employed. Are you actively looking for work? Well, if you're actively looking for work, then you're unemployed.
But then there are a lot of subsidiary questions. So would you like to have more hours, if you're working part time? And that's called part-time work for economic reasons. There's all kinds of dicing and slicing there.
But the point is that a lot of people have simply dropped out of the labor force. They get discouraged. They say, I don't think there's anything out there. Or they're afraid to leave home, or they've got kids at home. They can't really go out and look for a job. I mean, there's a lot of reasons. This virus is, no doubt, the most disruptive event in the world economy since World War II.
ED HARRISON: Well, you know, two or three questions come up for that. I wanted to talk about the K-shaped recovery for a second because you were talking about the Amazon effect versus these retailers, like the places that I went to that were ghost towns. But when you say it's the most disruptive, immediately I think to myself about the response. Because there are a lot of people, especially in the United States, who are bemoaning the policy response.
They would say, 100 years ago, we didn't have the same sort of policy response that we have today. More people died, and so forth. Do you think that policymakers have any choice than the ones that they've been taking? Because it seems to me that the United States is actually shutting down less abruptly, and the outcomes are more dire, in terms of public health outcomes. And that actually ends up hurting the economy on some level.
GARY SHILLING: Yeah. Yeah, that's a good point, Ed. If you look at the difference, the Chinese, of course, that's a top-down society. And it's very, very different, in terms of applying a shutdown. I mean, you either shut down, or you're in jail or dead. It's very simple choices. And we Americans are a different cut. We're much more independent.
But the point is, when you look at the Chinese, they just closed down that economy, and they've got the thing under control. They got tracing. They know who has had contact with anybody. They isolate them. And they were able to handle the problem fairly quickly. South Korea was the same.
But in this country, I don't think there's a public will to really shut down the economy. And politicians, of course, respond to voters, and so there's great reluctance to really deal with this. But you certainly can argue-- and with the ease of hindsight, going back to March-- if we had simply shut down the economy, said OK, we're going to just keep her closed for a couple of months, it's going to be it's going to be very, very devastating, but we'll get the whole thing under control, you probably would have been better off.
But an old hipster professor of mine used to say, there are no ifs in history. You don't what would have happened. But the point is, the way we're doing it now with opening and shutting and opening and shutting and all of this sort of waiting for the vaccines, it just stretches out the whole process.
ED HARRISON: Yeah, it's very destructive. And as a result, I think that government needs to step in, or many people think government needs to step in. And in Washington DC, in the area where I am now, that's where all the talk is. I mean, the biggest talk is about this $908 billion package, which has been put forward by both Democrats and Republicans in the middle, the moderates like Mitt Romney, Joe Manchin, who are talking about this.
It seems like the Democrats, the leaders in both the House and the Senate, have coalesced around this package, even though they want more. They said, you know what? This package has the opportunity to get passed. Let's back it. Let's make it happen. What's the possibility that this package gets done, and how much of an impact will it have on the near term, from an economic perspective?
GARY SHILLING: The more the virus spreads, the greater the hospitalization rate, obviously, the more pressure there is on Congress to do something. And I was, frankly, surprised that they didn't do something-- at least promise-- before the election to show people, hey, we're concerned. We're there to help you. But they didn't. And I think, at that point, there was some kind of a hope that things would fade. But now, with a resurgence of the virus, I don't think they have any choice.
Now, will this $900 billion and change be the last thing? It depends on the economy. But I think, at best, it's a stabilization kind of effort. And one of the things that they're trying to do now is to get money out in a lot more effective way.
What we see in retrospect, when you go back to March, there was near panic. And the idea is, let's get money out in a hurry. And the Payroll Protection Plan and so on and so forth, a lot of money went to businesses who were created just to collect the money. And there was a lot of fraud involved.
Well, there always is. There's always fraud in government programs. That goes with the territory. There's no bottom line. There's no profit potential, so why not?
But it was unusually bad, and I think it caused a lot of rethinking. And the whole idea that with a $600 additional unemployment insurance on top of the usual state benefits, 52% of people were making more by staying at home than they were when they were working. Well, obviously, that's not a terribly good idea, both in terms of encouraging people to work and simply the sense of what's fair.
So I think now, there's probably going to be a lot more thoughtfulness in the way this money is dispensed. And it may be that the effectiveness of this little less than $1 trillion program will be greater than more money would have been later, at least in terms of actually doing things for the people who need it and helping the economy.
ED HARRISON: The takeaway for me from what you said is that they're basically filling a hole. It's a make-good. It's not stimulus, per se. And so that would suggest that more is probably going to be done or needs to be done going forward.
The people who come to mind in particular are Janet Yellen and Jay Powell. I wanted to get a sense from you, how much do you think Yellen can and will do? How much can someone like Jay Powell can and will he do? And then how do you look at central banks writ large, given that we have zero rates, potentially negative interest rates in many different places?
GARY SHILLING: Well, the Fed has virtually run out of ammunition. And you remember, a couple of months ago, they really changed their policy, and they threw in the towel on targeting a precise 2% inflation rate. They haven't hit that in five years, and their credibility was very much at risk.
So now, they basically say, well, maybe 2%, but maybe it'll run higher and higher, maybe lower. And it's fading into the sunset. They never can say, that was a lousy idea to begin with, and we're just going to abandon it. They've got to basically save face on the whole deal. But the Fed is basically impotent at this point. They've done all they can.
Now, negative rates, you have that in Japan. You have it in some European countries. But it's had the opposite to the intended effect. You would think that you pay people to take the filthy lucre away, and that's what negative interest rates do, that they would borrow and spend like crazy. Oh, no, no, quite the opposite. People say, hey, wait a minute, my assets are going to be losing money at negative rates. So I've got to save more, spend less in order to prepare for the future.
So that program hasn't worked. And I think the Fed basically said, hey, we'll let the Japanese and the Europeans experiment with that. It didn't work, so they're out.
Now, in terms of the Treasury, no question that Yellen is very much in favor of further stimulus, as her history, but it's really up to Congress to enact these programs. And so I think I'd look more to Congress. Biden, obviously, is going to be pushing for these things. But there is this tug-of-war in Congress. And again, there is a strong feeling, particularly among Republicans, that the money has to be spent a lot more effectively.
And you do have this kind of undercurrent, if you will, of when do you take the training wheels off and the economy rides on its own. If you look what happened coming out of the Great Recession-- the '07, '09 recession-- you had tremendous quantitative easing then a huge fiscal package. And that really never got removed. The Fed did start tightening in December of 2015 a bit, but the economy never really was back on its own. And we had the slowest growth of any expansion in the entire post-war period, and then you're back in the soup with a virus.
And so I think there is this kind of feeling, is this an economy which only exists because of huge government subsidies? And of course, now you've got an excess supply world, which keeps inflation low, among other things. The Fed is pushing for that as well, so money is cheap. And is this a question, as long as it's cheap money, that's all you're worried about?
That's what markets seem to worry about. I mean, you look at the employment numbers. Here, you have very low employment numbers, and what happens? Bonds sell off, stocks rally.
Why? Well, it means more fiscal stimulus. This is a really strange world, but it does suggest that at least in terms of a lot of investors, the only thing that counts now is what happens in Washington. And the worse things are, the better it's going to be, particularly for equities.
ED HARRISON: Well, I get the sense that investors are going to be disappointed with the outcome, based upon what you're seeing is the backdrop here and also the backdrop that I see. Just to put it in a different way, we have this $908 starting-to-stand-still-- or however you put it-- bill that's going. That's with a Republican backing, to a certain degree, with a Republican president. When you get a Democratic president in office, Joe Biden, there's going to be less political will to work with him, perhaps, than there is with Trump. How is it even possible, then, that you get anything done in that circumstance, especially if the Senate remains Republican?
GARY SHILLING: Well, I think that's true. I mean, it's really just a matter of, how bad does the economy get, and therefore, how much pressure does everybody in Washington, Democrat or Republican, feel that they've got to bail out the economy? But again, the whole idea of government deficits, you go back to Paul Ryan when he was Speaker of the House, he was very much on the