Legendary Economist Warns 2026 Downturn Could Trigger 30% Market Crash — Gary Shilling

[00:00:00] Gary: This is a risk-off kind of environment. There's many investors and even more speculators who think things are going to the moon. What is there that's solid that is accounting for the exuberance in stocks, and you really can't find anything? [00:00:21] Speaker 2: Sorry, what do you mean you really can't buy anything right now? Our next guest is Gary Schilling, president of A. Gary Schilling & Co. Gary is a legendary economist, having a track record of prescient calls, including the 1969 recession, 2008 financial crisis, and the 1970s inflationary era. And now he's calling for a deep recession to hit in 2026. He's known on Wall Street for his contrarian calls and forecasts, and in today's episode, he's going to explain why he's particularly contrarian today, being bearish while markets are euphoric. Gary set up Merrill Lynch's economics department and served as its first chief economist. You can watch Gary's last interview with me in the link down below. And as always, if you haven't subscribed yet to this channel, hit the like and subscribe button for daily updates on markets and the economy with top traders, investors, and economists, and more. This video is sponsored by Kaoshi, the largest prediction market in the United States. Unlike a sportsbook, you're trading peer-to-peer on real-world events from economic data to political outcomes. And the price moves based on public opinion, not a house. Go to the link in the description and use code LIN, L-I-N. New users will get $10 when they trade $10. For example, you can trade right now on which deal Trump is likely to announce as part of his China trip, which we'll discuss with Gary today. Welcome back to the show, Gary. An honor to host you as always. Thanks for being here. [00:01:51] Gary: Glad to be with you again. [00:01:54] Speaker 2: There are several facets of markets that are interesting to investors right now, among which is one of the most pronounced rallies since the markets bottomed, or I guess troughed. I wouldn't say bottomed, but troughed about six weeks ago. Gary, the S&P is up 15% since basically just a few weeks ago. This level of movement and the speed at which it's recovering from a sell-off after the Iran war broke out, is this normal? You know, we talk about corrections, mean reverting, but the speed at which your mean reverts and then surpasses previous all-time highs. What does this look like to you? [00:02:47] Gary: You have to recognize that today's communications, things happen instantly. And the idea that what's happening now is not going to hit the media and the general populace for days, weeks, months. That's no longer the case. So you have a situation where markets move very swiftly and in reaction, really in anticipation of actions, and so it makes it very, very difficult to know what's going to happen next, because it's so much anticipation, and has to be played out, and a lot of times it isn't played out ahead of time, the way it's going to unfold in actual fact. And that complicates the situation, but I think we're in a situation now where there's going to be a lot of uncertainty that's going to continue to unfold, and surprises are probably to be expected. [00:04:30] Speaker 2: Would you characterize market sentiment right now as being euphoric or normal? By normal, I mean just a standard part of the S&P's life cycle, meaning if you take a look at the market's history. [00:04:47] Gary: Oh, I think they're very much on the upside, very much at the upper end of the spectrum, and that the risk is definitely down from here. Because you look at it and you say, what is really supporting? Well, it isn't consumers, consumers are, if anything, retrenching, it isn't capital spending, it isn't a big trade bonanza, that's definitely not the case. I mean, you just go through the whole spectrum, and try to say, what is there that's solid, that is accounting for the exuberance in stocks, and you really can't find anything. [00:05:56] Speaker 2: Sorry, what do you mean you really can't buy anything right now? Everything looks over value to you? [00:06:01] Gary: You don't have any major courses that are going to support stock, and obviously earnings. You know, you've got to have, you've got to have support for earnings, and have stocks respond on any long-term basis, and be solidly based, and you just don't have that one. [00:06:32] Speaker 2: Let's talk about what's going on right now in Beijing. So, as we speak, Trump and a host of CEOs are meeting with Xi Jinping and his administration. Xi reportedly told Elon Musk and other CEOs that China will open wider for their companies. Now, if China does make more business deals with the U.S., what does that mean for markets? [00:07:00] Gary: Well, China's got plenty of problems, and probably the biggest one is their collapse in their property market, which is not going away. And the government, the government is not all that interested in supporting property prices, so that continues to be a real drain on the Chinese economy. And unless the government decides to bail out real estate in a massive way, that problem is going to continue. And the government really doesn't believe in customers' spending. And they're much more interested in capital investments and productivity enhancements and exports. And if you produce all this stuff, what do you do with it? You export it. You're in the domestic demand, and it gives a very precariously balanced economy. And the Chinese leaders, this seems to be what they want. They don't really care that much about consumer spending. Of course, I'm sure they look on us and say the U.S. is absolutely going haywire the other way and emphasizing consumer spending and backing it, you know, in all sorts of ways. But, you know, I think the Chinese have a very different view of the world, and from their standpoint, their economy is doing pretty much what they will have to do. [00:09:23] Speaker 2: Which country, which country, the U.S. or China has more to gain from an immediate stop to the Iran war, do you think? [00:09:33] Gary: Oh, probably the U.S., and I'd say probably because it isn't, you know, it's a complicated issue and very good question. But, you know, China is being financed by export. You look at what's driving your economy, the Chinese economy, and it's basically export. And if you had a rapid curation of facilities, I think that would be very, very difficult for the Chinese to adapt to that very quickly. [00:10:37] Speaker 2: Well, this is from, this is, this is what investors are looking at right now. What will Trump announce as part of his China trip? This is from Kaoshi. It's a prediction market in the U.S., largest prediction market in the U.S., and investors have several trades that they're looking at. Either the Chinese and the Americans will make a deal regarding soybean purchases, U.S. oil purchases, aircraft purchases, rare earth export extensions, or reduction to tariffs. Which do you think or what do you think is the most likely outcome from a high level meeting between Trump and a host of American CEOs and China's Xi Jinping? [00:11:23] Gary: Well, probably, there's a lot of possibilities you've got listed there. But I think the agricultural purchases, soybeans first and foremost, but I think that's probably the most sensitive area, and the one where the U.S. has got plenty of supply and the Chinese have the basic demand. So I think that's the one that's probably most likely to see considerable actions and agreements. [00:12:10] Speaker 2: So would you be, would you be long agricultural products in anticipation of, you know, a deal to be made in this sector? [00:12:20] Gary: Yeah, it's one of these deals where they'll probably, you know, they want to announce a number of deals, if you will. And you say, well, which are the important ones? And I think the agricultural products is probably the most significant of all the issues. [00:12:50] Speaker 2: Now, you have said that a 20% to 30% correction is normal by historic standards. Right. Normal in what context? In the context of a bull market, where you have pullbacks of that magnitude, or in the context of a recession hitting the economy, in which a 30% correction is inevitable? [00:13:13] Speaker ?: Yeah, I think it's the latter. [00:13:14] Gary: Okay. Yeah, I mean, there just isn't a lot of basic support for the economy, U.S. economy, as I mentioned earlier in our conversation. And as a result, I think we're very likely to have a considerable recession and sell off in stocks. You know, the whole company apparatus that comes with a weakening economy and recession. [00:13:58] Speaker 2: Well, what would you, as an investor, do with that kind of outlook? Would you sell everything? [00:14:05] Gary: Well, if you look at, you know, we have in our monthly publication, call it Insight, we have a recommended list of investments. And, you know, what you buy, what you sell. And we think that this is a risk-off kind of environment. Now, that's not a very popular belief right now, because there's many investors and even more speculators who think things are going to the moon. And maybe you'll get there before the astronauts do. But, well, I think the speculation is really overdone in terms of euphoria for the economy. And what that means for particularly the stock market. [00:15:29] Speaker 2: You are legendary for having called several big recessions in the past. And, in fact, I believe, if I'm getting my history correct, you've been let go from Merrill Lynch because you've been bearish and accurately so. And you've called the recession in 1969. You've called the end of the 1970s inflationary era. And you've warned in 2006 that there's a housing bubble. And you've been twice named Wall Street's top economist by institutional investors for some of these calls and much more. What does this year look like? Sorry, let me rephrase that question. How does this year compare to prior recessionary periods? How does this compare to 2008? How does this compare to 1969 and people warn us of inflationary pressures from the oil shock? How does this compare to the end of the 70s when OPEC oil shock impacted oil prices and inflation? Can you draw any historical parallels to what we're seeing today, Gary? [00:16:39] Gary: Well, there are always differences, but I think we have many of the characteristics of overdone speculation, which is probably the major bear markets and stocks and recessions. History never repeats itself, but I think Mark Twain said it doesn't repeat, but it rhymes. And that's what I think you have now. It isn't a line-by-line repeat, but it is resembling it. And there's been a lot of speculation, you know, and there's a lot of money floating around out there. And where is it going? It's going into speculations. [00:17:59] Speaker ?: Mm-hmm. [00:18:00] Gary: And, and, uh, ultimately I think that's, that's very risky. [00:18:09] Speaker 2: When this recession does eventually hit, Gary, where in the economy where we see it first? In the credit market? In consumer spending slowing down? Or do you think that a stock market crash would lead to consumer spending less because the wealthy would have less money to spend after the wealth takes a hit? [00:18:34] Gary: Yeah, well, the, the latter of the possibilities you just outlined is, is certainly very inviting. It's, it's, it's, it's concrete. It's, it's the idea that the economy has been supported by spending, spending by people who have money and, and, and, and, and, uh, if they, if they decide to stop spending for whatever reason, the economy's in big trouble. So that's, that's, that's the most, that's the easiest one to identify. But looking for the easiest one is a lot of times not, not the correct one. The easy ones are, are the ones that are, are sometimes hiding what's really happening. But, but, but, you know, he could get, I, I, I think there's probably some kind of shock there that, you know, we could see whether this is a major correction in stocks. Um, is it, is it, is it, uh, is it a problem with, uh, speculation that we've seen in a lot of areas, uh, dot com area? [00:20:16] Speaker 2: Given that we now have a more risk off posture, and our risks are skewed to the down, to the downside, Gary. The question is, where do we hide? How do you feel about treasuries? The, uh, 10 year yield closed at 4.46% yesterday near the 2026 high of 4.48 in March. Are treasuries the place to go? [00:20:39] Gary: The, um, as I mentioned earlier, our monthly newsletter, uh, which we label insight, uh, gives a, um, a, um, recommended list of, of, uh, investment ideas every month. And, and, and we're suggesting that, um, investors should be, um, should be very cautious, uh, and, and really take a defensive posture. And that means being long, um, treasury bonds, um, being out of stocks or possibly short, um, major stock indices, um, and, um, being, uh, very, very cautious about other, other investments. Right. [00:21:46] Speaker 2: So, so are, are you, are you still, or would, would you still be launched treasuries, uh, in this environment, especially now that some people are saying that the market is pricing in the possibility of rate hikes, not cuts. Yeah. [00:22:02] Gary: That, that's, that's a, that's a good question because, um, you know, if we're, if we were having this conversation a couple of weeks ago, it would have been a lot more. A lot more, um, tilted toward being along treasury bonds. Uh, now it's, it's less, it's less certain that that's the proper way to address the future. Um, but, um, you know, you say, what are the alternatives? Um, and I, I, I, I still think that the safe haven effect of treasuries is ultimately going to be very important. [00:22:50] Speaker 2: Would you go overseas, Gary? I believe in one of your recent pieces, you addressed how India may be a bigger road engine than China. Yeah. [00:23:01] Gary: Well, we're, we've been, um, we've been very positive on India and particularly India versus China. India has a lot of advantages over, over China. It, it has no limits on population growth. Uh, it's, uh, it's, uh, it's, uh, the Chinese, the Indians are very good at technology. Uh, and the Chinese are concentrated on manufacturing. And if you look at the future, uh, as, as the economies grow, it's going to be the technology, I think, which is more important than, than production and export of goods. Uh huh. And, um, and, and, and China, um, so China is, is, is, is limited. Um, they had the, you know, one, one child per couple policy. Now they have rescinded that, but the, but the Chinese people have not responded, uh, with a lot more verse, verse. So, um, China is, is definitely not going to see population growth, um, for decades. And, um, I, I think India has, now India has got problems, but, uh, I, I, we're, we're betting on India versus China. [00:24:47] Speaker 2: So, that brings me to my last question for today, Gary. Looking ahead, long-term investors would probably look at demographics trends as a guidepost on where to invest. Now, several of the OECD countries, and actually for most of the developed world, populations are shrinking, um, or at least the fertility rate is below two. And in fact, countries like South Korea are projected to experience severe population decline over the next 50 years. Um, there's two ways to look at this. One is that the economy is going to collapse because there's literally nobody left to consume. Or, uh, we have, we have, um, a situation where machines and perhaps artificial intelligence will control most of the means of production. And the few people, I guess, remaining relatively few people remaining will still live in abundance and be prosperous. What do you think the future looks like in 50 years, Gary? [00:25:55] Gary: Well, it'll turn out to be something quite different than any of us can anticipate now. That's the one thing I think it can be certain of. But, um, you know, there has been a great feeling for some time that demographics are the most important aspect. You have a lot of, you'll have a lot of people. Um, you're going to have a lot of output. It's, it's, it's going to, it's going to provide, uh, economic growth, uh, military, uh, wherewithal. And, and in, in that sense, China's got major problems. Um, they're one child per couple policy, which they now have, have, uh, rescinded. But the Chinese people have not, have not responded with increased population. So, um, um, I, I, I think the demographics very much favor India. Um, I mentioned India also gains because their orientation is toward technology and, um, China, it's, it's sort of not a fashion. Um, and, you know, that's all well and good, but it, it, it doesn't have a future, uh, appeal that, uh, what the technology does with, with India. Um, India also inherited, um, from the British, um, a legal system. Now it's, it's, it's, it's not, it's not exactly up to the standards that we would like to see in the U.S., but it's, it's certainly, uh, a lot better than China, where, you know, you either do what you're told in the future. Uh, and, uh, and, uh, you know, there, there, there, there's just a lot of ways in which, uh, China is concentrated on, on top-down control, on manufacturing, uh, and, and it just, it, it, it doesn't have a long-term. Uh-huh. Prospects that, you know, technology does with India and, and with an unfettered population growth. [00:28:41] Speaker 2: Okay. My last question to you, Gary, I see a lot of newspapers in front of you. What's your morning process like? What's your morning routine? Do you scan the front page of the Wall Street Journal, um, and then call it a day? Or are there particular pages on the newspaper that you always go to first? In particular, pieces of news or, uh, sectors that you watch more than others? [00:29:03] Gary: Well, I, I, uh, everybody's got their own approach to this, but I, I, I think that, for me, uh, reading the Wall Street Journal cover-to-cover is pretty much required more in reading. Um, and, you know, they're, they're, they're obviously, that isn't the only source of, of news. Uh, but, uh, I, I think it's a lot, it's a lot more straightforward, uh, reporting, a lot less political. New York Times is, I think, very much, uh, geared towards socialism. Um, and, you know, that's all well and good if you're, if you're in that frame of mind. But in terms of markets and what's going to happen, I think the Wall Street Journal is, is going to give you a lot better perspective on what's going on. So that, but they're, you know, other things you should certainly, I want to be aware of, uh, uh, the, uh, financial. [00:30:12] Speaker 2: Well, let's, let's suppose you don't have time to read the entire paper. Uh, what do you, what do you skip to in the morning? You know, what do you, what do you prioritize? [00:30:26] Gary: Well, I would, I would, I would, uh, probably skip the New York Times and, uh, I would, I would skip, um, um, um, you know, I read Barron's when I get a chance, but not always ever prime. [00:30:48] Speaker 2: And, uh, economic data comes out every week. Are there more, are there indicators and data releases that you find are more important than others for an economist like yourself? [00:30:58] Gary: Yeah, that's a good question because our clients pretty much expect, expect me to have digested the important notice in the morning. There's, I, I, I, I'm, I, if I'm talking to them in the morning, um, they pretty much assume that I'm familiar with what happened overnight. And if I, if I, if I'm not, um, you know, that, it may, it may not be important, but it, it can be, it can be detrimental. Um, so I'd say I start there, um, but there are, but there are, you know, plenty of other, plenty of other sources. And then oftentimes, uh, clients, friends, fellow travelers will say, oh, did you see, um, did you see this article in such and such publication? Well, if I haven't, take a look. [00:32:09] Speaker 2: Okay, good. Well, thank you very much, Gary. Uh, where can we stay off to date with your work and learn more about your views? [00:32:16] Gary: We, we'd be happy to send people a, um, sample copy of our monthly newsletter insight. And, uh, we can, we can get that, uh, by our, just by, by requesting it. Okay. Um, www, um, crowd insight, um, KGS and company. [00:32:44] Speaker ?: Excellent. Well, thank you. [00:32:46] Gary: Thank you very much, Gary. Uh, we, we appreciate your insight. [00:32:49] Speaker 2: Uh, we, we, we look forward to staying in touch some more. And, um, what, what do you think was your proudest work looking back at many decades of, you know, service on Wall Street and to your clients? Was it your books? Was it your newsletter? Uh, was it the founding of Merrill Lynch's economics department? Was it beekeeping? You know, what do you want? What do you, you know, what do you want people to remember you most for? [00:33:22] Gary: In, in my, in my profession, the top of the tree is when you go against the crowd and are right, for the right reasons. In other words, it wasn't just dumb luck, but you, you correctly understood what was going on and made a forecast that turned out to be correct. Uh, in line with that. And I've had, I've had, I guess, more than my share of that. Uh, but I, but I think that that's, that's where I would concentrate. And I think some of those calls, um, particularly the unwinding of inflation and, um, and, and the, uh, uh, effects on, on, on treasury bonds. Yeah. Probably the one that was the most spectacular in terms of being completely opposite from, from the herd. And, you know, that's, that's what really, that's what really counts. I mean, being, being, being right with, with the consensus. [00:34:46] Speaker 2: No, you don't add any value with that. Why, why are you, and we'll, we'll end it here. Why are, why is it important rather? Why is it important for you to be contrarian at times and unique in your thinking? As for example, you've been warning us throughout this interview of risk and valuations and risk to the downside at a time when, like I started in the interview by saying markets are up 15% in the last couple of weeks, new all time highs are hit daily for the last couple of weeks. And the Dow just regained 50,000 points. You're, you're very much against the herd now. Why is that important for somebody to understand? [00:35:37] Gary: Well, because you don't get being, being, uh, correct and with the herd, um, doesn't add much value. Um, but going against the herd and being correct does add value. Mm-hmm. I think it's that simple. Okay. [00:36:06] Speaker 2: Thank you very much. Appreciate it. Okay. Thank you very much. [00:36:10] Speaker ?: Appreciate it. [00:36:10] Speaker 2: Okay. [00:36:11] Speaker ?: Thank you very much. Thank you. Thank you very much. Appreciate it. Okay. Thank you very much. Thank you very much. Thank you very much.