Gary Shilling's 5 Things to Worry About

Despite recent volatility, the market has held up pretty well this month and appears to have found its footing in the past three days. Clearly, the downturn could've been worse given the headlines coming from Japan, Libya and the Mid-East generally -- not to mention America's ongoing struggles with high unemployment and the bursting of the housing bubble.

Lest you lapse into a false sense of complacency, we bring you Gary Shilling's 5 Things to Worry About:

Japan: Looking beyond its horrific humanitarian and environmental disaster, Shilling sees Japan facing a problem financing its rebuilding effort. Currently, only about 6% of Japanese government bonds (JGBs) are owned by foreigners (vs. over 50% of U.S. Treasuries), which has enabled Japan to fund its deficit spending at extremely low rates: 10-year JGBs yield 200 basis points less than comparable Treasuries.

But Shilling expects Japan's trade credit account surpluses to dwindle in the coming months and years. In the short term, Japan will need to import more materials and energy to powers its rebuilding efforts and will have its exports cut by the shuttering of much of its manufacturing capacity. In the long term, he sees Japanese exports falling as U.S. consumers continue to retrench and their surpluses eventually turning negative.

"They could very well have trade and current account deficits in next couple of years and that means they'll have to import capital...and they'll have to pay up for it," Shilling says. "Then that debt, [already] over 100% of GDP, really starts to get expensive. It could be a very tough situation."

Housing: Following a 9.6% drop in February existing home sales, median home prices are now at the lowest level since 2002. Citing the "huge overhang" of inventory of homes for sale - both listed and in the "shadows" - he predicts another 20% decline in national home prices over the next few years. That, in turn, will put more stress on consumer spending and push more mortgage holders under water, prompting another round of "strategic defaults", a.k.a. jingle mail.

China: As detailed here, Shilling expects a "hard-landing" for China, where authorities are trying to mop up excesses created by their massive 2008 stimulus (12% of GDP vs. 6% for America's). "They got inflation and a property bubble and they're trying to tighten up," he says. "I don't think most people expect a hard-landing, which would be dropping back to 5-6% real GDP growth from double-digits now."

Energy Prices: "A Middle East oil crisis is suggested by the riots and/or government overthrows in Tunisia, Libya, Egypt, Algeria, Yemen and Bahrain as well as rumblings in Saudi Arabia," Shilling writes in the most recent edition of Insights. "Remember that the first oil crisis in 1973 when the Saudis suspended oil exports and the second in 1979 in the aftermath of the Iranian revolution were both associated with major recessions."

Europe's Debt Crisis: Time prohibited us from exploring it in the accompanying video, but Shilling - like many others - is concerned that Europe's sovereign debt crisis could lead to a banking crisis and potentially the dissolution of the euro.

Of course, the optimistic spin on this is that one, these issues are "known knowns" and arguably priced in at current levels. Two, if the market climbs a wall of worry, there's plenty of fuel for additional upside after the recent hiccups.

Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com

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