With a perfect storm brewing on the horizon, investors should be
building their cash cache and running for cover, warns Harry Dent, author of The
Great Crash Ahead. In this exclusive interview with The Gold Report, Dent
explains how central bank stimulus programs are fighting a futile battle
because a huge army of aging baby boomers has reached the stage in their
economic lifecycles when they curb spending. How is Dent preparing for the
gathering storm? Read on. . .
The Gold Report: Your considerable
research over many years indicates that the size and age of its citizens
drive a country's economic growth or decline. Because people have predictable
consumption patterns throughout life, you can predict well in advance
national economic growth or decline. How does that work?
Harry Dent: We've identified a peak
spending wave indicator that correlates strongly with the stock market and
the economy. It doesn't apply so much to emerging countries, where we look at
urbanization rates, which greatly affect incomes,
and workforce growth because emerging nations don't have a middle-class curve
where typical consumers earn $60,000 a year at the peak of their careers.
In developed countries,
though—countries with higher-tech infrastructures and a solid middle
class—this spending wave indicator peaks at around age 46. People slow
in spending way ahead of retirement, from 46 on. That is basically when the
average person's kids are leaving the nest. In fact, the greatest slowing
comes from age 50 on. That's the correlation, that people earn and spend more
money dramatically as they approach midlife. On average, they enter the
workforce at about age 20, marry at 26, have their first child when they're
28, and hit 46–50 when that child gets out of school. Then their
spending drops like a rock. Part of that is because they're saving for
retirement but, more importantly, they don't need bigger houses and don't
drive their cars nearly as much. It's just a natural life cycle in developed
countries. It's the ultimate leading indicator.
We saw the spending
slowdown we're experiencing now coming 20-some years ago, when we came up
with this tool. We said baby boomers' spending would peak around 2007 and
slow down from 2020–2023.
TGR: Is the pattern the same
across the globe, or do slowdown years differ from country to country?
HD: There's some degree of
variation, but the post-World War II baby boom pretty much happened around
the world. Birth rates in most developed countries peaked in the late 1950s
to early 1960s, so the whole developed world is pretty much synched on this
baby boom, all peaking together. Japan is the one exception, where births
peaked twice, once in 1942 and again in 1949.
TGR: So you've gone back
through history and now can predict that every 40 years or so a country's
economy slows as waves of babies come through. Is the age-related consumption
pattern the only demographic you use to evaluate what influences economies?
HD: Another cycle comes into
play as well. It's an 80-year economic cycle consisting of two generational
booms and busts, like the Bob Hope generation that drove the U.S. economy up
from 1942–1968 and then down from 1969–1982, and then the baby
boomers who drove it up again from 1983–2007 after that 46-year lag,
and now down again from 2008–2023. Additionally, these boom-and-bust
pairs go through a pattern we relate to the four seasons.
"We've identified a
peak spending wave indicator that correlates strongly with the stock market
and the economy."
If you think of the
consumer price index (CPI) in temperature terms, a high CPI is hot, or
inflationary, and a low CPI is cold, or deflationary. A deflationary period
or depression, as we're going into now, is the winter season. A spring boom
follows, with a new generational spending pattern and the modest inflation
that comes with it.
In the summer, with that
generation entering the workforce, inflation continues to rise. We do a lot
of research to demonstrate that young people are inflationary. They have more
to do with inflation than any other factor, and nobody has a clue of this in
economics. The last summer in the U.S. occurred when the baby boomers entered
the workforce in large numbers, basically from the late 1960s through the
The fall boom brings
bubbles and the resulting expansion of debt. Stocks, real estate and so on
bubble up and when that boom ends, those bubbles burst. Winter sets in again,
with restructuring and deleveraging of debt, which create deflation.
The 1970s was a
difficult recession time, but it was inflationary, not deflationary, and not
similar to the downturn that the Federal Reserve is trying to prevent now.
The Fed is actively and constantly inflating the economy to prevent deflation
to avoid a replay of the Great Depression. But it won't be able to hold it
TGR: Let's talk a bit about
the debt issue.
HD: In the U.S., most
people focus on government debt. Under George Bush, the national debt grew
from $5 trillion (T) to $10T in 2000–2008. At the same time, the
banking system, financial systems and shadow banking—in the private
sector—created $22T in debt. That was the greatest debt bubble in
history, and it occurred in developed countries all around the world. So we
have this global debt crisis and this debt has to deleverage. Everybody is in
too much debt—financial institutions, consumers, businesses and
governments, with central banks propping them up and bailing them out.
Obviously, this can't go on forever.
If the demographics
weren't working against the Fed and the other central banks, it might be
different. But they're fighting a battle they can't win because the baby
boomers are working against them. How do you stimulate an economy when the
largest part of its workforce, the aging baby boomers, wants to save and not
spend, to pay down debt?
"How do you
stimulate an economy when the largest part of the workforce, the aging baby
boomers, wants to save and not spend, to pay down debt?"
That's the problem. The
money the Fed creates gooses up the markets, but doesn't do much for the
economy, and banks aren't lending. It's crystal clear in history. Every time
you see a big debt bubble in a fall boom—as in the 1860s and
1870s—a depression follows. We saw this from 1873–1877 and into
the early 1880s. We saw the next big bubble into the roaring 1920s, followed
by the Great Depression and debt deleveraging after that. In short, debt
bubbles ultimately burst and then deleverage. Deleveraging debt destroys
money, so there's less money in the system and it means deflation in prices.
That's very important
for investors to understand. In a deflationary crisis—whether in the
1930s or what started in 2008—everything goes down: commodities,
stocks, real estate, even gold and silver in many cases. In deleveraging an
asset bubble, all assets go down and there's nowhere to hide. Investors have
to be in the U.S. dollar and very safe bonds and cash and wait for the crash,
and then buy at the bottom. That's the trick. Cash is king—cash and
In contrast, in an
inflationary crisis such as the one we had in the 1970s, commodities, gold
and silver were booming. Japan was in a positive demographic cycle. Emerging
countries benefited. Real estate loves inflation. In that environment, a lot
of things go up, but stocks and bonds go down. In this environment, though,
there's nowhere to hide.
So people just have to
get out of the way. Even with all the stimulus, the
Fed has no way to restore normalcy with this debt level and this demographic
downturn. The stimulus has merely created bubbles in stocks and commodities,
and commodities are already going down pretty fast. We think stocks are next,
so we expect another stock crash within the next few years. And the next
crash will be worse than in 2008–2009 because the Fed has pumped
everything up and stretched the system to the max.
This is what happens in
the winter season. It's a survival-of-the-fittest struggle for businesses to
see who will dominate their industries for decades to come. So it's a huge
payoff for the companies that simply survive and it deleverages the whole
debt and asset cycle and brings things back to affordability. So it's a
difficult season, but it's necessary and actually good in the long term.
Lower prices in general will increase the standard of living.
The government is trying
to skip winter. It keeps heating things up, pouring the money into the
economy so the banks don't deleverage debt and the banking system doesn't
collapse as it did in the 1930s. The truth is, it's only keeping us in high
debt and maintaining a bubble that's not sustainable. Sooner or later, this
stimulus will result in a crash that takes down the economy.
The top 10% of consumers
are the only ones still spending. We know from demographics that wealthier
people marry and have kids a little later. Their kids go to school a little
longer, so their spending peaks four to five years after the average
person's. After these folks' spending peaks, which will be by the end of this
year, we'll have a second demographic drag on the economy.
TGR: So we're basically just
getting into this 2008–2023 winter depression. How deep will the trough
go? Will it bottom at the midway point? What should consumers expect over the
next 20 years?
HD: A winter season lasts
from 13 to 15 years or so. The worst collapses in stock prices and real
estate hit when the banking system deleverages. In the 1930s, that happened
early on. In this case, the government took a lesson from the 1930s and
decided to keep pouring money into the banking system to prevent its
meltdown. But it can't be done. There's a limit to how much you can
stimulate. It's like a drug. It takes more and more of the drug and it has
less and less effect until it has almost no effect, and then the drug itself
We're seeing that in
Europe already. The last round of stimulus there—Qualitative Easing
(QE) 2—was massive and came well after QE2 in the U.S., but Europe's
already back in trouble again and is having to implement all sorts of
emergency procedures. There's no bailing out Spain. It has one of the biggest
real estate bubbles in the world and a rapidly aging population. The Spanish
people won't be buying housing for decades.
TGR: What do you see in terms
HD: The worst is likely to
hit in the next two years. It's a matter of when the stimulus stops working
or when governments throw in the towel. At some point, for example, German citizens
may just say they won't bail out another country. They've been doing it to
protect exports and avoid defaults on all of the money they've loaned out
already, but considering the demographics, it's a losing game.
We've studied all of the
major debt bubbles and depressions in history, and this one is different
because Keynesian economics, which came out of the Great Depression, wasn't
adopted as economic policy until the 1970s recessions. So now, for the first
time in history, central banks around the world—the European Central
Bank (ECB), the U.S. Federal Reserve, the Bank of China and the Bank of
Japan—are actively fighting deflation. When banks start to deleverage
or when deflation starts to step in, they just push money into the system.
The question is: Do they lose control?
Japan has been through
all of this before, but when it came into its crisis in the 1990s, it had
budget and trade surpluses. The rest of the world was experiencing the
greatest boom in history, which we'd predicted. There was mild inflationary
pressure and everybody thought Japan was about to take over the world when it
was about to collapse. We were among the few who predicted that ahead of time
in the late 1980s.
Japan continued to push
money into the system and never let private debt deleverage at all in either
consumer or financial sectors. Japan is still carrying very high private
debt, and its government debt has risen from 60% of gross domestic product
(GDP) to 230% and still climbing. So Japan didn't really go through a
depression. It was more an on-and-off mild deflationary recession because the
stimulus eased the pain. But now Japan's debt is much larger than before the
crisis and deleveraging still looms ahead. Japan has been a lost economy for
22 years now. Real estate is down 60% and stocks are still down nearly 80%,
22 years later.
Demographics say the
Japanese economy will weaken even further after 2020. The interest on its
debt will go up in a spring boom with rising inflation worldwide, and it will
be bankrupt immediately because its debt is so high. It's only because it's
borrowing at 1% or less that it can handle its deficits now. Sooner or later,
this game has to end.
TGR: So Japan's QE has raised
government debt to more than 200% of GDP but only managed to postpone a
HD: Yes, it kicked the can
a couple of decades down the road. It's like trying to resuscitate a patient
with a defibrillator. You keep hitting the chest, clear, boom. At some point,
the patient dies. If the bond markets allow the U.S. to keep putting in money
like Japan, we'd end up with a balance sheet on the Fed at $5–6T and up
with QE of $4–5T before this is over. We've only gone about $2T so far.
The Fed stimulus pushes money into the banking system, but the banks don't
lend it to fuel economic growth. They cover their losses and reserves, and
then turn around and reinvest the rest in government bonds and stocks.
They're speculating. The money ends up in the stock markets. It's like crack
in the markets, and the markets just want more crack. But the markets can't
continue to go up when demographic trends are pointing down.
TGR: Your earlier mention of
losing control brings to mind the people of Greece out in the streets rioting
because demands for further sacrifices and more fiscal austerity have become
HD: It is true. One of our
financial advisers who was there recently reported
every third store is closed or boarded up. Greece is in a depression and
Spain's headed there. The ECB has already pumped $270 billion into Spain and
Greece just to cover its bank runs, which may happen faster than the
governments can fend them off. In the U.S., the vulnerability is much more in
real estate, as in Spain. We have a backlog of close to 4 million
foreclosures already in the system. At some point, the banks will realize
that home prices are not coming back. That they haven't come back in Japan
after 21 years gives us a hint. But if the banks start dumping these millions
of foreclosures that aren't on the market, it would kill the housing market
and trigger a bank crisis that the Fed couldn't stop with stimulus.
China also is
vulnerable. Exports, which drive most of its economy, are declining rapidly
while government spending on vacant buildings and empty cities has created a
real estate bubble. If that bubble begins to seriously break down, Chinese
consumers with disposable income, the top 10% of the population, own the real
estate that will lose its value.
TGR: A while ago, you said
businesses that manage to survive the winter would dominate their industries
for decades to follow. What advice do you have for those running companies to
help them come out the other side of a depression?
HD: First, those who are
running a company and thinking about retirement within five years should sell
their companies and retire now. Those who want to keep their companies and
hand them down to the next generation or continue to grow them should hunker
down, cut costs, cut overhead and put off capital expenditures. Rent your
building; don't own it. Sell real estate. Sell marginal product lines. In
fact, sell everything you don't need. Do everything to raise cash because, as
I said before, cash and cash flow are king. Be lean
and mean. Office space, real estate, factories, warehouses, anything you want
to invest in your company will be a lot cheaper after deleveraging. Even if
your business weakens, if your competitors weaken more rapidly, you're
winning. At some point, a lot of your competition, just like a lot of banks,
be looking to invest more in emerging countries because they're going to
We saw this phenomenon
after the Great Depression. There was a big payoff for the companies that
survived; they dominated their industries for decades to come. Everybody
thinks the market leaders were born in the technology revolution in
automobiles and electricity in the early 1900s and into the roaring '20s.
Certainly, the race was on then, but the shakeout of the Great Depression
decided who was left standing. General Motors survived and absolutely
dominated the automobile industry from the 1930s through the 1970s. In
electronics, it was General Electric.
TGR: You've also emphasized
the importance of cash and cash flow for investors, advising them to either
exit the equity markets or greatly reduce their exposure to stocks.
HD: Yes. Take advantage of
the fact that the Fed has revived stocks and sell when the market is high.
Reinvest when the prices are low. Joseph Kennedy made his fortune in the
early 1930s, getting out at the top of the market when his shoeshine boy was
giving him advice. When stocks were down 87%, he was buying at
$0.10–0.20 on the dollar.
TGR: What are you doing
personally to preserve or grow your wealth during this winter?
HD: I moved from Miami to
Tampa in 2005, at the top of the real estate bubble and I've been renting, so
I avoided a huge loss. Real estate in my neighborhood is down about 50%, and
probably will fall another 20–30% before it's over. I'm just looking at
investments to actually be short stocks. I'm looking at ProShares
Ultra Short MSCI Europe (EPV), which is an exchange-traded fund (ETF) at two
times short the MSCI Europe index. The ProShares UltraShort Financials ETF (SKF) is another good one, two times short financials, because the financials in
Europe are tending to get hit the worst. I think there's a rising chance in
Europe in the next few months of either a mini-crash, about 20% off the top,
or a major crash like 2008–2009, where Europe just blows up. One way or
the other, you need to either be out of stocks or you need to bet on things
TGR: Any other insights?
HD: We're buying natural
gas, which seems to be going up since it bottomed out at $2. We're buying
agricultural commodities because that's the last thing to go down in demand,
and emerging market demand is still strong. Apart from natural gas and
agriculture, though, pretty much everything else we see going down.
TGR: What about gold?
HD: I think gold has
another run in it. It's trending down right now, but I'd expect gold to
benefit from the early stage of this crisis. If we have one more big QE coming in the U.S. and Europe—especially
in Europe—gold is likely to rally. We told people to sell silver when
it hit $50/ounce (oz) in April of last year. Now
we're suggesting selling gold if we see a good rally, say, $2,000/oz or higher.
Ultimately, there's a
natural instinct to expect gold to go up in a crisis, but if you look at
2008, gold and silver went up in anticipation of a financial crisis. But when
the crisis actually hit and debt started deleveraging and money supply
started contracting, which happened in the second half of 2008 and early
2009, gold went down I think 32% and silver went down 50%.
TGR: Everything went down.
HD: Exactly. That's the
point. The only thing that went up was the U.S. Dollar Index and Treasury
bonds. This time, I think Treasury bonds may turn around. People act as if
German, U.S. bonds and United Kingdom bonds are risk free. They are not.
These U.S. and UK governments are in terrible debt, and Germany is holding
the bag for Europe. People are throwing money at negative yields just because
they don't know where else to go. A better bet might be to go long the dollar
or, even better, short the euro. That would be a good hedge.
TGR: What's the best
investing advice you ever received, Harry?
HD: Basically, I think you
have to think contrarian, because it's just human nature for people to pile
into something, especially in these bubbles we've seen. They pile into tech
stocks or real estate, thinking they can't go down, and then the bubbles
burst. I learned early on to think contrary to the crowd, something like
Joseph Kennedy. Right now, most investors think these markets can't go down
because the Fed won't allow them to. They call it "the Bernanke
Put." Well, if everybody's thinking that, I don't think that.
TGR: Whom do you view as the
HD: The classic ones are
Benjamin Graham back in the good old days and Warren Buffett these days,
although I think Buffett's off base now that he's become a cheerleader for
the U.S. government.
TGR: You're speaking at the MoneyShow in San Francisco in
late August. What major themes will you cover?
HD: Basically three things:
debt, demographics and deflation. People who argue that hyperinflation is
ahead are dead wrong. Japan had zero inflation for the last decade despite
massively more QE than we've done relative to its economy. It would have been
a deflation if it hadn't stimulated so much and the world hadn't been in an
inflationary mode. Debt deleveraging leads to deflation,
and aging societies are deflationary. Old people are deflationary, young
people are inflationary. The inflation of the 1970s had nothing to do with
monetary policy. It was the baby-boom generation partying in college,
spending their parents' money. It's expensive to raise kids, who don't
contribute economically until they get into the productivity curve in the
workforce. At that point, productivity drives down inflation.
TGR: Do you expect the U.S.
to fare better than Europe over the next two decades because of the echo
boom, as the millennial generation gets into a serious spending cycle?
HD: Yes. The echo boom
kicks in from about 2023 forward in the U.S. and in a lot of countries. It's
nowhere near the size of the baby boom generation, but enough to create
growth again. But there's no echo boom in Southern Europe or in China, where
the workforce will start shrinking like Japan's after 2015. Japan's little
echo boom runs out by 2020, and because Japan never deleveraged its economy,
it's not even benefiting much from it.
But, yes, there should
be a worldwide boom with the stronger developed countries—Northern
Europe, North America and Australia—doing fairly well, though as I say,
not as strong as the boom we saw in the 1980s, 1990s and early 2000s.
Excluding the developed countries of East Asia—Japan, Korea,
China—the emerging world will really dominate in terms of demographics
and workforce growth. Investors should be looking to invest more in emerging
countries because they're going to outperform. I would look first at India
and Southeast Asia.
TGR: Should we be doing that
HD: Not yet. I'd wait until
after the shakeout. China's slowdown is hurting emerging countries, which
depend on exporting resources, and so are the collapsing commodity prices. By
the way, the 29–30-year commodity cycle has nothing to do with the
40-year demographic cycle, but they happened to peak in the same timeframe,
TGR: Other than going to
cash, what else should people be doing to prepare for the
depression/deflationary period ahead?
HD: Cut expenses and
high-interest debt. I wouldn't cut a mortgage if I'm paying 4–5% tax
deductible on it, but get rid of credit card debt with interest at 22%. Don't
make any big capital expenditures. Don't buy a house and don't let your kid
buy a house. If you're more aggressive, you can bet on markets going down.
For example, you actually can make money in the downturn if you short the
euro, European stocks and U.S. financial stocks. But for most people, it's
just better to be safe.
TGR: Easier said than done
HD: Unfortunately, the
government is making it very difficult. The stimulus programs are knocking
down interest rates on safer, long-term bonds so people can't get yield
anymore. If they go after yield, if they rush into bonds, stocks, commodities
or especially dividend-paying stocks—which are the most popular thing
now—they'll get creamed when the stock market crashes. The alternative
is to give up the dividends and low yields. Just be safe. You'd be crazy to
buy a 10-year Treasury at 1.4% yield or a 10-year bond at 1.3% yield. All the
countries are going to be in trouble.
TGR: Thank you, Harry, for
your time and your insights.
Harry Dent will be a
keynote speaker at the upcoming MoneyShow in San
Francisco on August 24–26, 2012. Click here to register for free.
Harry S. Dent, Jr. is founder and CEO of
the economic research and forecasting organization that bears his name and
publisher of the HS Economic Forecast and the HS Dent
Perspective. During the early 1980s, while a strategy consultant for
Fortune 100 companies and new ventures at Bain & Co., Dent recognized the
force that baby boomers exerted on the trends of the time, which led to his
development of The Dent Method, a long-term forecasting technique based on the study of
and changes in demographic trends and their economic impact that financial
advisers and individual investors use via Dent's Monthly Economic Forecast,
Economic Special Reports, Demographics School and The Financial Advisors
Network. HS Dent also provides two newsletter services. Former CEO of several
entrepreneurial growth companies and a new venture investor, Dent also is a
sought-after speaker and best-selling author. Since 1988 he has been presenting
to executives and investors around the world, appearing on Good Morning
America, PBS, CNBC, CNN and FOX and featured in Barron's, Investor's
Business Daily, Entrepreneur, Fortune, Success, US News and World Report,
Business Week, The Wall Street Journal, American Demographics, Gentlemen's
Quarterly, and Omni. Dent's books include The Great Crash Ahead
(2011), The Great Depression Ahead (2009), The Next Great Bubble
Boom (2006), The Roaring 2000s Investor (1999), The Roaring
2000s (1998), The Great Jobs Ahead (1995), The Great Boom Ahead
(1993) and Our Power to Predict (1989). Dent received his Bachelor
of Arts degree from the University of South Carolina, graduating first in his
class, and his Master of Business Administration from Harvard Business School,
where he was a Baker Scholar and was elected to the Century Club for
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