Five Things Gary Shilling Says You Should Be Worried About


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Yesterday, Gary Shilling, author of A. Gary Shilling’s Insight newsletter, sat down on Yahoo! Finance’s TechTicker program and shared five things investors should be concerned about in today’s market. Shilling, known for his doom and gloom predictions, is concerned about:

  1. Japan
  2. A hard landing in China
  3. Housing in the United States
  4. The energy crisis
  5. Debt in the European Union.

Shilling particularly elaborated on his concerns regarding Japan and the U.S. housing overhang.

Talking about Japan, Shilling focused on the long term repercussions regarding Japan’s debt, rather than solely the short term global supply disruptions caused by the earthquake and tsunami. He pointed out that a large majority of Japan’s government debt – 96%, in fact – is financed internally. That arrangement has historically relied upon a trade surplus; recent events will result in both a decrease in exports (due to decreased economic production) and an increase in imports (due to material and energy needs). The result is a negative trade balance that creates a tough situation for the nation.

Regarding housing, Shilling is equally bleak. Reiterating points he discussed with Steve Forbes early last month, Shilling pointed out a huge overhang of 2 to 2.5 million excess units in the United States. That sort of overhang, says Shilling, could take five or six years to work off, and could result in up to a 20% decline in the housing market. As more mortgages go under water, says Shilling, strategic defaulting “becomes a favorite cocktail of party conversation.”

When Shilling sat down with Steve Forbes in February, he also talked about his concern over a hard landing in China. He told Steve Forbes:

China is very export-oriented. I think 2008 was a wakeup call for the Chinese leaders because they had a marvelous machine going. It was driven by exports. And then they produced all the capital equipment and plant necessary to produce those exports. They had an inexhaustible supply of cheap labor. And they had good growth to accommodate all the people moving from the hinterland to the cities.

Those people saved like crazy. The saving rate in China is almost 30%, if you can believe that. They put that money into the banks at very low interest rates. And then they turned around and lent that to the state-owned enterprises. And they were, in effect, arbitraging on these very low-cost funds and kept a lot of inefficient enterprises in business. But it was a functioning deal.

Well, I think 2008, with the recession and U.S. consumers retrenching, was a huge shock for the Chinese leadership. And they realized that they have to get going and work on a domestically-driven economy.

Yesterday on TechTicker, he predicted that China would drop back to 5% or 6% real GDP growth, from its current double digit levels.

Click to watch the full Steve Forbes Intelligent Investing interview with Gary Shilling.

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