Are we at the top of a sucker’s rally to end all sucker’s rallies? Harry S. Dent Jr. thinks so, and he’s got a best-seller to prove it. The Great Depression Ahead reports that the downturn that began in 2008 was nothing more than a warm-up act. A sort of Long John Baldry to The Rolling Stones that lay ahead.
Dent deserves a listen. He called the 2008 downturn, back in 1992. And he’s not one of those perennial bears who keep predicting a recession until one happens. He forecast the boom of the 1990s at a time when many disagreed.
Dent’s calls have been mainly demographics-based. His research shows that we spend the most when we’re in our mid-40s. “The peak in spending is age 46,” he told me in a phone interview last week. “If you take the peak of the baby boom in 1961 when they were born, and you add 46, you get: hey, the boom’s over by the end of 2007.”
There’s much more to The Great Depression Ahead than simple arithmetic though. “We have this four-season cycle over time. There are no exceptions to this. You get a deflationary period like the 1930s. Then you get a spring boom like the 1940s, ‘50s and ‘60s with mild inflation. Then you get a summer downturn with very strong inflation. Then you get a wonderful fall bubble boom with disinflation and very low interest rates. And then you get winter again with deflation.”
Extending Dent’s analogy, the credit crisis that began in 2008 threatens to make this one of the coldest winters in history.
Dent predicts an extended downturn, stretching into the early 2020s. “Just like we predicted for Japan back in the late 1980s, which occurred,” he said. “Our economy goes through this progression over and over again.”
Dent made six predictions during our call:
- The U.S. stock market will crash in 2010. “Even though the economy is recovering, and even though GDP is coming in even stronger than expected, look at defaults on mortgage loans: residential and commercial. They’re just going straight up. All these defaults lead to foreclosures. Foreclosures continue to keep housing prices depressed. And as long as they stay down, more and more people are under water in their mortgages and more and more people default … A lot of mortgages reset around July, August, September. That’s what we think is the trigger. We think that by late summer, the banking system is going to be in trouble again, the economy is going to start to fail and stocks will be crashing.”
- Recovery in the U.S. will be hampered by a massive deleveraging process. “One of the things we’ve done in our newsletter is outline the total debt in the U.S. People are looking at the federal deficit, that’s the smallest thing. Debt and leverage in financial institutions, which has never occurred before, is $17 trillion. Consumer debt is $14 trillion. Unfunded liabilities – social security, Medicare, Medicaid – is anywhere from $45 to $65 trillion. That’s something a corporation would have to report as a liability. And corporate debts are at $11 trillion. When you see that in history, it’s crystal clear. There’s only one thing that happens. You get a deflationary, deleveraging downturn. That is what a depression is – a big chapter 11 for the economy.”
- The commodity bubble will burst. “The biggest liability for Canada is its dependence on exports and commodity prices. We see this commodity bubble bursting, and continuing to burst. We think oil is going to get back to somewhere between $10 and $18 a barrel in the next two, three or four years.”
- B.C. real estate will be a good investment, eventually. “There will be a second boom in retirement and vacation homes. And the most attractive area for that obviously is British Columbia. I would not be buying that now, and I wouldn’t be buying in Whistler, Vancouver or Victoria. Those are some of the most over-valued markets in Canada. Buy after a crash, which I think you’re going to see in the next two, three or four years.”
- Worry about Japan’s sovereign debt. “Japan has got a unique problem. They already have unbelievable debt. They basically chickened out of dealing with deflation and deleveraging and didn’t really let it happen except in the corporate sector which is the smallest part. So they’ve got high debt and an aging population. The only reason Japan has been able to sail through this, without it being much worse, is that they have very low government interest rates: 1.5% give or take. That’s because they have such a high-saving public. People save the most in their 50s. Now Japan is going to be tilting more toward the 60s where people spend their savings to retire. Their savings rates have already dropped very substantially in the last couple of decades. And they’re actually going to go negative at some point. So where is Japan going to get this cheap money? Government debt is going to rise during this downturn, because governments have to take the shocks.”
- Worry less about the U.S.’s sovereign debt. “They’re just not going to be able to keep it up. We think the voters and foreign creditors are going to call a halt to the U.S. just going into endless stimulus.”
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