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, 2007
On 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 grea
test
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.”