In our latest interview with demographics and economics prognosticator Harry S. Dent, Jr., we discuss the market's recent softness, Dent's target for upcoming market top, and his thoughts on the eventual taper.
Dent is the author of The Great Crash Ahead: Strategies for a World Turned Upside Down, and editor of the free newsletter Survive and Prosper. You can read our previous interviews with Dent here, and learn more about his work at www.harrydent.com.
EQ: The S&P 500 has pulled back since hitting the all-time high of 1709 in early August, and there seems to be some softness in the market from a sentiment standpoint. Is this beginning of the sell-off do you think it’s still early?
Dent: I think it’s still too early. Usually, you get a semi-serious selloff, which this could turn into heading into September as we have the debt debate and the ceiling coming up again. We’re continuing to see difficulties in emerging countries, and money fleeing from them. Currencies are falling, and foreign exchange reserves are dropping because commodities prices are falling. We have all this hot money from the Fed and other developed countries and central banks that ends up fueling the speculation in emerging countries. It’s just part of the bubble.
We’ll probably see a more serious correction over the next few months. It’ll be one final rally, and anytime we’re in a final rally, you should start seeing some serious divergences. We’ve seen some here, but not really. You should see small caps underperforming large caps, and selling pressure going up even though the last wave of buyers are coming in. That shows us that the smart money is exiting. We did not see that from this last rally to 1709. So I think this is the top before the top, and I’m looking for a real top somewhere in January 2014.
EQ: Small cap stocks and the Russell 2000 has been especially soft. Are you watching this segment for the divergence to signal the market’s turning point?
Dent: We just look for the advance-decline line to not reach new highs when the market does. This applies especially to operating companies. When you take out the financial companies and the non-operating companies, it did not occur. It may have just barely, but it was not a strong enough signal. We use Lowry’s Indicator, which is the best service, to track for buying and selling pressure. There’s no question in this case that buying pressure continued to go up and selling pressure continued to go to a new low. That’s not the sign of a top or of divergence.
The markets should be more worried than it is here. You got civil wars all over the Middle East, emerging countries that seem to be caught in vicious cycles of falling commodities prices, and that hurts China. I think these emerging countries are going to keep having problems and eventually burst China’s bubble. That’s my biggest fear of what’s going to cause the next stock crash. Because Europe’s weak but they just keep limping along and they have been able to limp along this long without causing a world crisis. Some people say they are getting better, I say they’re not. Few economies are getting better. Things are not getting better in Greece and Portugal. They’re still in depression, and at some point, staying in the weaker cycle is just not going to work. There are many things that can burst this next bubble and the market is not even worrying about them that much. That shows the market is kind of cruising for bruising.
The U.S. real estate rebound is quickly going to prove that it’s not a real sustainable recovery. It’s mostly speculation from the Fed stimulus, and that money has to go somewhere. So when stocks start to slow and commodities fall and gold falls, investors end up looking at real estate again. So the money just keeps bubbling around until this whole stupid thing blows up, I’ve never seen anything so insane for central governments to be purposely feeding bubbles and financial assets around the world like it’s not dangerous.
So to be stopping the entire free market system from rebalancing and deleveraging, they’re destroying creativity and innovation. They’re killing the golden goose here and their justification is that it’s fine because it’s not causing inflation.
The reality is, the consequences of this quantitative easing are huge and we are going to see bubbles burst again. We’re already seeing emerging countries basically wind down. They got fueled up with hot money by central-bank stimulus from around the world, and now that hot money is leaving so those bubbles are bursting. I’m just waiting for the next trigger.
Usually, the market should give you some signs of that. The smart money should start exiting and we are not seeing that yet. So I’d say there’s a low chance that this is a top. We’ll probably get another correction, and another rally would put us right around somewhere between the December, January, and February period. That’s where I’m looking for a major top.
EQ: Do you think when the Fed eventually begin to withdraw some of their bond purchases and their stimulus strategy, that will have an impact a major impact on the global economy? Are they as intertwined as before, or have the major economies managed to separate their problems a bit more?
Dent:No, it does impact it. All this stimulus impacts the whole global economy. All this hot money goes into financial institutions, and they’re not lending it. Instead, they’re speculating—and often at high leverage—and this money just swishes around the world, driving up one bubble after the next. You already have the biggest reason that the U.S. stock markets are off a bit from that 1709 peak on the S&P 500. They’re starting to see the Fed is heading towards the exit. They just don’t know if it’s October, November, or December.
They’ll probably do it very slowly, but once the Fed starts, they usually stay in the same direction. So the market is anticipating that sometime in 2014 there’s going to be no more stimulus. Even if they just knock off $10 billion a month over the next several months, there’s going to be no more stimulus. Without stimulus, there is no way this recovery is sustainable. It has taken a trillion dollars a year on average in fiscal deficits from the Fed and the US alone just to create 2 percent growth.
Anybody with any common sense and any objectivity would have come to the conclusion that without that stimulus, which only creates maybe $50 billion at best in GDP growth, we would be in a deep recession. So to me, if they do keep tapering, we’re going to fall into a recession again. Then they have to make a decision do they look like total idiots and start stimulating heavily again. So I just think the Fed is checkmated here.
If the economy gets a little better, they are going to have to taper, and that’s going to cause a crisis down the road. If the economy keeps getting weaker and they have to keep up the stimulus, then what it’s saying is the stimulus has gotten to the point where it just doesn’t work anymore. We saw that housing and durable goods came out this month at incredibly low levels for both indicators.
Europe already hit that in mid-2012, way ahead of us. So this stuff does have an impact. It helped beef up emerging markets in their lending and financial speculation, but now they’re seeing a crisis because the hot money is going away due to the anticipation of the end of the central bank stimulus.
Any time you inflate something up artificially, you create the risk of that it’s going to blow the other way and break down. The way I see it, governments are just creating bubbles. They know they’re doing it. They’re keeping the bubbles going because they don’t have any other options. Consumers are never going to come back and buy houses like they did, that’s already been proven. Businesses are not going to borrow and expand like they did in the bubble boom because everybody over expanded. So they don’t have any other option than to keep the bubble going, and just cross their fingers and hope they can keep it from bursting. It’s the stupidest thing I have ever seen. Of course, it’s going to burst at some point. It just takes a trigger.
EQ: The summer months are known to be slower. Is the market right now sleep walking through this and possibly creating a potential rude awakening when everybody gets back to their desk in sometime September/October?
Dent: Usually, August to early October is the worst period for the stock market, partly because of this lull. Frankly, the market is holding up pretty darn well given the bad news in the economy recently, and the low volume. What’s going to happen is traders get back in the summer by early September, and we start getting into the whole debt ceiling debate again with Republicans fighting Democrats, and we have the September elections in Germany, and this continued price spiral in commodities that’s causing problems in emerging countries.
September is probably the most likely month I would see us having a 10-percent correction, creating a short-term buying opportunity. If we do rally to new highs after that, my target is the 16,000 or a little higher on the Dow, which is where we hit this megaphone topping pattern where each new high hits a higher high. Then the next thing you know, a couple years down the road, we could be down to 5000 to 6000 on the Dow. Every bubble has gone to higher heights and every crash has taken us to lower lows.
People say that can’t happen, and the Fed has their back, but this has done nothing but happen since 1987. If you don’t at least worry about this or expect that it may happen, then you’re just totally not objective here. Every bubble has burst and the valuations are similar to what they were in 2007. All we need is a trigger in an economy that is overstretched with debt, and demographic trends are only getting worse, particularly in Europe over the next few years.
EQ: So what are your upside and downside targets for the S&P 500 and the Dow?
Dent: For the S&P 500, it would be about 1740 to 1750, and the downside will be 600 or so. For the Dow, we see an upside of 16,000 to 16,200, and 5,800 to 6,000 on the downside. Those are big swings.
EQ: When we last spoke, you said gold was due for a bounce, and it certainly has, jumping over 11 percent since early July. What do you think of the precious metal at these levels?
Dent: I still think gold is going up higher to probably $1,500, plus or minus. There’s resistance at $1,430 and stronger resistance at $1,525. That’s where it really broke down out of a two-year channel between $1,525 and $1,800. That was a big break for gold, and pretty much said that the bubble had peaked and it was over. If it can get above $1,525 and stay there, then that’s a different story, but I don’t think it’s going above that. I’m telling people, whoever has gold or silver left at that point, that’s going to be a good place to sell.
EQ: What are some trends that you’re focused on right now?
Dent: Over the last several months, I’ve really worked on worked on refining our longer-term and intermediate-term cycles, especially for my new book, Demographic Cliff. For the first time, in a long time, they all point down from very early 2014 into late 2019. Some cycles continue to get a little worse after that and some are just turning down now, but I put the whole picture together. I’ve never seen a higher chance of some type of financial crisis coming in the next six years, particularly starting in 2014. I’m going to be looking at the first half of 2014, and if we don’t start to see stocks correct 20 or more percent by then and get into some sort of global crisis, it may be farther down the line. But that’s the highest risk period I see. If we get to the first half of 2014, then we’ll be able to tell more. But if you’re an investor, you don’t want to be caught in another 2008 crash, because it sure looks like we have one coming.