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Gary Shilling of A. Gary Shilling & Company, spoke at John Mauldin’s Strategic Investment Conference in San Diego last weekend and Robert Huebscher, CEO of Advisor Perspectives, was kind enough to take some notes.  He provided the 5 things that Gary Shilling sees as threats large enough to derail the recovery:

“First was housing.  Shilling was among those who correctly identified the housing bubble and predicted its collapse in 2006.  Today, excess inventories – between 2.0 and 2.5 million houses – may lead to a further price decline of 20%, Shilling said, which is the decline necessary to bring housing back to its long-term trend.  He cautioned that markets usually overshoot on the downside.

The oil market and the turmoil in the Middle East were Shilling’s next concern.  He said he wasn’t sure how severe the problem might become, but he was adamant that high oil prices would not trigger inflation.  “As long as you have high unemployment, there is virtually no risk that high oil prices would seep over into the wage structure,” he said.  “It isn’t inflation; it’s a tax – and it is a big tax on the consumer.”

Japan was Shilling’s third concern, and he called that country’s economy a “slow motion train wreck.”  Japan faces a serious problem down the road financing its huge government debt, he said, which it has done so far largely by selling bonds to its citizens.  That worked while Japan ran a trade surplus, but unfavorable demographics and a weak US consumer will eventually create a current account deficit, at which point the Japanese will have to borrow from foreign markets – at much higher interest rates than the 1.25% it pays now.  That could lead to a “death spiral,” he said, wherein additional debt would be necessary to fund interest payments.

Fourth on Shilling’s list was the Eurozone debt crisis.  Shilling said that he expects a restructuring to take place to resolve the problems facing Greece, Portugal, Ireland and perhaps Spain.  A recession in Europe would follow, which would impair US exports.  It will also create problems for the US banks, which collectively own 28% of the debt in the Eurozone.

A likely “hard landing” in China completed Shilling’s list of concerns.  China now faces 12% inflation, he said, which is very significant for the bulk of its population that earns modest incomes.  Slowing down China’s economy will be very difficult.  Its central bank has already raised reserve requirements eight times since January of last year and raised interest rates four times over that period.”

Read the full piece here.

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