If you’ve consumed any financial commentary over the years, you’ve likely heard of Gary Shilling. His legendary, against the herd, call on interest rates in 1980 set him up for a 40-year run that made him exceptionally wealthy.
If you recall, many investment gurus in the early 1980s were predicting the future while projecting the past. After a decade of raging price inflation, the popular dogma was to pack one’s portfolio with gold coins, fine art, and antiques.
This was the proven, surefire way to preserve one’s hard-earned wealth from the ravages of inflation. The recent past and simple logic pointed to higher consumer prices ad infinitum.
Nixon had closed the gold window in 1971. Prices had quickly spiraled out of control. America, it seemed, was about to go full Weimar.
Howard Ruff, in his investment newsletter The Ruff Times, was predicting the dollar would soon turn to hyperinflationary ash, like conifer trees in a California wildfire. It was inevitable. And imminent!
But then something unexpected happened. Ultra-high interest rates courtesy of Fed Chair Paul Volcker brought on a recession. An inflection point was hit. Consumer price inflation stabilized. And a new trend of asset price inflation – including stock, bond, and house price inflation – was born…though it wasn’t immediately clear what was going on.
In September of 1981, the yield on the 10-year Treasury Note peaked at 15.32 percent. Many investors thought yields would go higher. Franz Pick declared “bonds are certificates of guaranteed confiscation.”
Yet Ruff and Pick and many others got it wrong. Yields commenced a 39-year decline that ended in June 2020 with the 10-Year Treasury note yielding just 0.62 percent.
To be fair, there were a few true contrarians in the late 1970s who foresaw what was coming. Gary Shilling was one of them.
Riding the Long Bond
Rather than the consensus view that inflation would persist forever, Shilling suspected the U.S. was entering a long-term era of lower and lower interest rates and low consumer price inflation. Under this backdrop, traditional inflation hedges would be dreadful…
…and debt based financial assets would be highly prosperous.
Shilling, having a deep conviction and wanting to warn investors, wrote a book about his important insight. The book was first published in the early 1980s, and its title asked two significant questions: Is Inflation Ending? Are You Ready?
The book’s sales were an utter flop. Almost no one wanted to hear Shilling’s case. There were only a handful of shrewd individuals who could actually fathom that consumer price inflation was dissipating.
The book’s forecast proved to be right on the money. What’s more, Shilling put his money behind his convictions. By the mid-1980s he achieved financial independence through aggressive investment in the long bond.
Shilling’s astute call and capital deployment into the long-term decline in interest rates starting in the early 1980s is remarkable. But what’s also remarkable is Shilling’s ability to successfully ride out this trend long after other big bond investors – like Bill Gross – bailed out.
Many investors thought interest rates had bottomed out in late-2008 at the depths of the great financial crisis. Fed purchases of mortgage-backed securities and Treasuries, made possible by $8 trillion in credit created out of thin air, extended the trend until July 2020.
Cheap consumer products imported from China and cheap oil and gas from innovative hydraulic fracturing extraction techniques, also kept a lid on consumer prices. But these sensations can no longer contain consumer prices like they did a decade ago.
Very Thin Ice
Shilling, for his part, is still in the investment game. And for about four years now, Shilling has been warning us about an imminent bear market. Yet for four years, the market has responded by repeatedly hitting new all-time highs.
Still, Shilling isn’t just a permabear looking for attention. He’s an economist who looks for the big flaws the larger investment community ignores. His insights, and track record, merit attention.
In a recent sit-down with Business Insider, Shilling laid out his bearish forecast. He believes that a recession is “almost inevitable” and that the S&P 500 could crater by 30 percent by the end of 2026. His rationale is based on the unfavorable position of consumers, sky-high stock market valuations, and interest rates.
For the last two years, the U.S. consumer has been the driver of the global economy. Despite rising interest rates and the everything bubble, Americans kept spending. Shilling points out that this ballast is starting to take on water.
The growth of real disposable income, for example, slowed to a measly 0.4 percent yearly pace in March 2026. That’s the lowest we’ve seen in three years. At the same time the personal savings rate has dropped to 3.6 percent. People aren’t just spending what they earn. They’re dipping into the rainy-day fund just to keep the lights on.
There’s also the war tax of the ongoing conflict between the U.S.-Israel and Iran. This hasn’t just disrupted geopolitics. It’s hitting people in the wallet.
The U.S. national average price for gasoline has increased by 50 percent since the war started in late February. When the price of gas goes up, discretionary spending – the spending that drives growth – goes down.
As Shilling puts it, the consumer is on “very thin ice.” If they stop spending, the whole economy stops with them.
Disconnected from Reality
With respect to the stock market, Shilling referenced three metrics that suggest we are living in a fantasy land of valuations.
The first is the Shiller CAPE Ratio. It’s currently hovering above 41. That’s a level we haven’t seen since the lead-up to the dot-com crash. When you pay this much for a slice of future earnings, you’re basically betting on a miracle.
Second, Shilling noted the Price-to-Sales (P/S) Ratio. Like the CAPE Ratio, it’s also off the charts. This week it hit 3.63, which is an all-time high. Investors are paying more for a dollar of company revenue than ever before in history.
Last is Price-to-Book (P/B) Value, which is also at an all-time high. What this means is that the market value of companies is completely disconnected from the actual value of their assets.
Shilling believes a 20 percent to 30 percent correction wouldn’t be an anomaly. It would merely be a return to historical sanity. He’s eyeing the end of 2026 as the date for this reckoning.
While he admits he can’t see the exact “trigger” yet, he reminds that market drops usually stem from “excesses.” And right now, the market is full of excess.
But it’s not just about stocks and consumers. Shilling is looking at the structural pipes of the economy – housing and business investment – and he sees some major clogs.
Specifically, he sees a housing market that is effectively frozen. Sellers don’t want to give up their low pandemic era rates, and buyers can’t afford current rates. A frozen housing market means less mobility, less construction, and a massive drag on GDP.
Shilling also points to a collapse in capital expenditure (Capex) – the money businesses spend on new equipment, buildings, and hiring – across the private sector. While the AI sector is spending like there’s no tomorrow, the broader Capex grew only 3.9 percent at the end of last year. Compare that to the 24 percent peak several years ago.
Businesses are hunkering down, not expanding. That’s not what you want to see in a healthy economy.
Shilling, no doubt, has been early in his recent forecasts. But that doesn’t mean he’s wrong.
The US economy in 2026 is riddled with contradictions. The Fed is trying to grease the gears with $40 billion a month in liquidity, while inflation-adjusted incomes are stalling and the national debt is ballooning.
Is a 30 percent drop coming?
Shilling believes it could happen this year. And whether it happens by December 2026 or not, his message is clear: The era of easy growth is over. The ice is thin, stock valuations are off the charts, and a bear market is inevitable.
All the reasons to keep a little extra cash on the sidelines. If Shilling is right, everything is about to go on sale.
[Editor’s note: Get a free copy of an important special report called, “Cash Machine – Why You Should Own this Mineral Royalty with a 12% Yield,” when you join the Economic Prism mailing list today. If you want a special trial deal to check out MN Gordon’s Wealth Prism Letter, you can grab that here.]
Sincerely,
MN Gordon
for Economic Prism
