Gary Shilling: China’s Problems Are The World’s Problems

In an excellent interview with STA Wealth’s Lance Roberts, A. Gary Shilling dives into a number of issues. From four more years of deleveraging to go to five potential major shocks that will force “an agonizing reappraisal and switch to “risk off” strategies” for most long-only equity investors, Shilling is cautious; but his biggest fear is China (for these 8 reasons)…

Via STA Wealth Management,

There are a number of shocks that would force investors into an agonizing reappraisal and a switch to a “risk off” strategy. Most investors with long-only equity portfolios don’t want to walk away from a winning game. Like most humans, they play until they lose, as was true of the dot com stocks in the late 1990s and the housing bubble-driven market in the mid-2000s.

Here are five potential major shocks:

A financial crisis in China if she bungles her attempts to shift from an export-driven to a domesticled economy while opening financial markets;
an escalating confrontation between Russia and the West over Ukraine and nearby countries;
a spike in oil prices resulting from a blow-up in the Middle East or in Venezuela; and
global contagion resulting from developing country woes.
We’re not forecasting one or more of these shocks to materialize.

Nevertheless, in a slow growth world, they can’t be ignored since it doesn’t take much of a hiccup to turn meager growth into a self-feeding decline in economic activity.

However, the 800lb gorilla in the room is China. China’s problems are the world’s problems, and there are eight of them that singly – or more likely, in combination – could precipitate a major crisis