Gary Shilling meets me at the bar of the restaurant with a large plastic jar in his hands. Since developing a serious beekeeping hobby a few years ago, he has been giving his clients and associates a gift of honey from Shilling Apiaries. The label reads: “Our Honey is Sublime, Not Subprime!”
Who: A. Gary Shilling, President, A. Gary Shilling & Co.Where: Serenade, 6 Roosevelt Ave. Chatham, N.J., January 11, 2007On the Menu: Fresh honey, subprime glory and visions of unwinding derivatives contracts, crashing commodities and further housing declines.
Shilling is the one man who can afford to joke about the subprime residential mortgage mess, which has left so many finance professionals in tears. Back in January 2004, he is quick to point out, his newsletter, Insight, identified subprime mortgages as a weak link in the then-booming U.S. economy: “Subprime loans are probably the greatest financial problem facing the nation in the years ahead.”
Pretty prescient, wouldn’t you say?
Soon thereafter he was contacted by a guy then known as J.P., an obscure hedge fund manager, who thought Shilling’s bearish forecasts made a lot of sense. Well, by now that guy, John Paulson, has become a Wall Street legend. The funds he runs made $15 billion in 2007 by buying credit default swaps, an insurance instrument against default in collateralized debt obligations (CDOs) securitized by subprime mortgages. Paulson himself is believed to have had the largest payday in Wall Street history, making as much as $4 billion last year and promptly joining the Forbes list of 400 richest Americans.
Paulson & Co. bet the farm on the expectation that the mortgage bubble would burst. Shilling also put some of his own money into the scheme.
“I now wish I put all my money into it,” he wistfully says now. But the 600 percent return that he has raked up to date — along with the first hedge fund Paulson set up to short subprime mortgages — ain’t that bad either. Shilling still meets with Paulson and his fund managers regularly to assess the mortgage market and to strategize on how to profit from future developments.
Dr. Disinflation”This was one of my best calls,” admits Shilling.
Not that there weren’t others. During his career as a Wall Street economist, which began back in the 1960s, Shilling has developed a reputation as a professional contrarian. But he is not a contrarian just saying something to oppose the consensus. He has been right quite a few times — which is the reason why he has been a Forbes columnist and a weekly guest on CNBC’s “Kudlow and Co.”
I worked for Shilling in the mid-1980s. At the time he was known around the Street as Dr. Disinflation. Just when the second oil shock came about in 1979, Shilling began predicting the end of inflation and soon thereafter wrote a book called Is Inflation Ending? Are You Ready? It recommended that investors buy risk-free 30-year government bonds and, as he put it, “stocks that look like bonds” — shares of blue-chip corporations that pay steady dividends.
Few people paid much attention to his book and sales flopped. Inflation had just reached an all-time peak rising into the double digits, commodity prices were sky-high and shortages of goods and services seemed to be pervasive. Most people thought Shilling’s ideas were a laugh. Shilling also laughed — all the way to the bank. Having arrived to our lunch appointment with a sheaf of his newsletters in a folder, he shows that if you invested in a 30-year government bond, and adjusted your holdings to keep maturities stable at 30 years, your portfolio would have outperformed the Dow Jones Industrial Average by a long shot — even though over the past quarter of a century the stock market has seen its strongest rally in history.