A. Gary Shilling & Co.
- A legendary market forecaster explained why he likes making contrarian calls.
- Taking a divergent view is more valuable and interesting — and pays better, Gary Shilling said.
- Shilling warned the S&P 500 could crash 30% and a recession is likely to strike this year.
From Michael Burry's "Big Short" against the housing market to Warren Buffett's warnings during the dot-com bubble, some of the biggest names in finance have taken contrarian stances that paid off.
Legendary forecaster Gary Shilling is also defying market consensus by warning the S&P 500 could crash 30%, and predicting a recession will strike this year. He told Business Insider in an interview he actively seeks to disagree with Wall Street for several reasons.
"It's really pretty simple," he said. "You don't add value by rehashing the consensus — that's already discounted in markets. I don't think anybody's gonna pay you very much for that."
Shilling served as Merrill Lynch's first chief economist before quitting to launch his own investment-advisory and economic-consultancy firm in 1978, A. Gary Shilling & Co. He's known for making several correct calls over the past four decades.
While a divergent view may be worth more than a mainstream one, that isn't sufficient for Shilling to voice it. He'll only adopt a stance if it meets three criteria: it's important, has a good chance of happening, and is not yet a consensus view.
When he finds something that fulfills all three requirements, "boy, you jump on them with all fours."
Shilling gave the example of his accurate prediction of the "bond rally of a lifetime" in 1981. He was also one of only a few people including Burry to diagnose the mid-2000s housing bubble. Shilling partnered with hedge fund manager John Paulson to bet on a crash, and made about 16 times his money as a result, he said.
Always challenging
The veteran economist might zig when others zag, but he doesn't consider himself a contrarian as he doesn't always disagree with the consensus.
Shilling said he was naturally inclined to probe the prevailing wisdom and interrogate others' claims, and his education honed that instinct.
"I was trained as a physicist — you always are challenging, always are looking for what's new," he said. "That's what's caused progress in the sciences, going back to Newton and Copernicus."
Shilling said he finds taking a different view to be more intellectually stimulating than nodding along with the crowd. But he admitted it can be tough to disagree with the masses.
"It's a never-ending source of embarrassment for my wife," he joked. Shilling explained that when the pair are guests at a cocktail party, someone might make an innocuous comment like, "Isn't that a beautiful yellow moon," and he can't resist replying, "Are you sure it isn't blue?"
Other market veterans have faced similar peer pressure to conform.
In a recent memo, economist David Rosenberg described being mocked, yelled at, threatened, having things thrown at him, and being labeled the "skunk at the picnic" and the "class clown" for predicting the mid-2000s housing bubble would end with a recession.
Shilling may not be facing quite that level of blowback, but it's certainly not easy to have conviction in one's contrarian views — even if they are more valuable to the market conversation, lucrative, and interesting to hold.