Stocks have certainly experienced a considerable increase in volatility over the early part of the Summer, and with major economic and market concerns returning to the forefront, that trend will likely continue.
In our latest discussion with demographics and economics prognosticator Harry S. Dent, Jr., Equities.com asked for his insights on when the market will most likely reach its top, as well as what his thoughts on commodities such as gold and oil. 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: In late May, the S&P 500 hit a peak of about 1669, before falling about 5.7 percent over the course in June. Is this playing out as you expected for the late-year sell-off?
Dent: We were expecting 6 to 10 percent, and it’s been slightly on the side, but I think it’s over and stocks are probably going to seek one more good rally here. The biggest question I have, however, is whether it’s going to be a short rally ending in around the end of August, or if it’s going to be a more extended rally like the last one, which could last into maybe January or so. That’s what we’re looking for in terms of range.
Our next target is 16,000 on the Dow, and we think that’s almost a given in the markets. So we’ll see at least 16,000 and that’s where people may want to start thinking about selling stocks.
EQ: The market has been a bit calmer lately, probably because of the recent shortened holiday week. But we are in earnings season again, and the Fed’s comments are being heavily scrutinized again by Wall Street. Do you see a lot of volatility over the next couple months through the summer?
Dent: I think that a lot of people do, but this is closer to over. If anything, I think people overreacted a bit to the Fed’s recent comments. Yes, they are going to have to back off and taper at some point, but they aren’t even really suggesting that until later in the year, and if we do see any weakness in the economy, that won’t happen.
So, I think that the Fed is probably going to go out of its way to reassure people that they are not going to do anything any time soon. I don’t see why the markets wouldn’t continue to edge up, unless we have some international problems.
EQ: Are we getting the economic numbers that suggest that a pull out from the Fed would not hurt the market as much as investors fear?
Dent: Well, I still think that it will. Investors did react and thought it might come sooner than later, maybe by September or something. But I think the Fed would want to see a number of months of this first.
Both housing and autos, two most interest rate-sensitive industries, are doing very well right now. So to me, if we get employment numbers of 200,000-plus and continue to get decent auto and home sales numbers, then yes, they are going to have to start tapering later this year.
EQ: Recently you raised a very significant concern regarding Germany’s demographics. The country has been viewed as the economic rock of the eurozone during their crisis. Based on what you find is that about to change in a major way over the next few years?
Dent: Yes, it is. In general, Europe is kind of in a plateau between 2007 and 2014, in terms of the different countries and their economies. Germany is one of the first to start to drop out of that plateau, along with Austria and Switzerland. Those are some of the most solid countries, along with England. France is wobbling and Southern Europe is all in difficult periods. So yes, we keep saying Germany is first, but Europe in general, has been in pretty deep trouble. They haven’t fallen off the demographic cliff like the United States did after 2007 or like Japan in the 1990s, but it’s going to be hard for Germany to hold Europe together and keep bailing out other countries if their demographics start weakening.
Their strong suit is clearly their exports, but if you start to have your internal demographic trends weaken, that’s going to be a challenge. That may actually be what tips Europe into a deeper recession, perhaps next year. If Germany and some other countries begin to slow, then who’s going to be left to bail out Europe?
EQ: They don’t really have any other economy in there that can step up if Germany starts to show some weakness.
Dent: Right. There is France, which is the next biggest, and Germany and Switzerland a little more solid. But again, France’s demographics do hold up a little bit better. It’s Germany, Switzerland and Austria that I am worried about slowing down next.
EQ: In our last interview, you mentioned how a slowing China and the resulting crash in commodity prices could be a potential trigger that no one is talking about. We got a scare from them not to long ago. What are your thoughts about that market right now?
Dent: Things over there just seem bubbly. There was just an article in the New York Times about China announcing a new plan to step up urbanization even faster in 12 years. By 2025, they are going to move more 250 million more people off of farms and into high rises.
So what the plan for them? Well, they’ll first get some jobs building the high-rise apartments and the infrastructures. But what comes after that?
If we don’t have a continued growth economy, and China’s exports keep slowing–especially to emerging countries and especially Europe–what are they going to do with all these people? They are going to have the greatest potential for civil unrest in modern history if they keep moving hundreds of millions of people into these urban cities and not provide them with jobs.
These people can be self-sufficient on their land. They may not be good consumers, and they are not as productive, but if you move them off that land and they don’t have that option anymore because you bought that land and turned it into something else, what are these people going to do when your economy slows? So China is just like everybody else.
We are in this giant bubble, and there are bubbles everywhere with quantitative easing bubbles, financial assets bubble, and China has a giant over-building bubble, and now, they’re upping the ante. Everybody’s response to slow growth is to up the ante even more. That’s exactly like a drug addict taking more and it’s no longer an analogy. This is what’s happening.
At some point, something goes wrong—and most likely, it’s going to be in Southern Europe or China—and it trips the world economy into another recession and downturn. Then all these bubbles get exposed again. Even in the U.S., the interest rates are rising despite stepped-up bond buying. That’s the beginning of the Fed’s policy no longer working very well.
The danger places, however, really are in Southern Europe and China right now. Japan at least had a positive demographic trend ending in 2020, so their stimulus—as reckless as it is—may pay off for a little while. But China and Southern Europe are showing signs that something is about to go wrong, perhaps even within the next six to 12 months.
EQ: Looking at gold, it’s just been hammered and keeps getting hammered with no signs of relief. What are your thoughts here? Do you think that it will actually fall below 1,000?
Dent: Our target for a good while has been around the $700 to $750 level coming out of the 2008 lows, but I didn’t expect it to fall this quickly because of the U.S. and Japan stepping up their stimulus programs–especially Japan. Japan went off the reservation with this thing.
But two things have happened kind of under the table since 2012. One is India’s currency has been weakening because of their trade imbalances. That has caused gold to be more expensive to its consumers, and India’s consumers are the biggest buyers of gold in the world, with China second.
The second thing that happened is that inflation, despite the stepped up stimulus in the U.S. and Japan, fell in the last several months from 2 percent down to 1 percent. Governments are stepping up stimulus, and inflation falls. It was the final arrow at the hyperinflation gold bugs. They have been saying for years that we are going to get hyperinflation because we keep printing money, and we kept saying for years that the end game here is actually deflation. The next time the world goes down, we are going to see a lot of debt deleveraging, and debt deleveraging is deflationary.
The market’s finally done and I don’t think that we are going to get inflation. How much more money can you print and get zero to 2-percent inflation, and think that you got an inflation problem? Indian consumers were the first hit, and then all these hedge funds that were leveraged 30-to-1, 40-to-1, 50-to-1 had to start dumping their gold possessions to meet margin calls. It’s just like when they had to dump their oil positions in 2008 when that started collapsing. It just starts to feed on itself. But I would tend to say that gold is certainly due for a rally now. It might rally for a hundred points or so, and then anyone who has any gold left would be inclined to sell it.
EQ: Kind of like a dead cat bounce then. Now do you think that turmoil in Egypt will push up oil prices over the summer?
Dent: It could. Oil has been in one of these sideways trading ranges for a while now, between $85 to $100. It could break up substantially higher, but it’s kind of hard to see Egypt to be the problem. The markets are just looking for something direct. It’s all about the Suez Canal, and I guess that’s always a possibility but that just doesn’t sound that likely. I would not think that’s going to be the trigger, but you never know.
EQ: Wonderful, Harry do you have any closing comments on maybe something major that we haven’t touched on in this interview?
Dent: We look at the top of a market, like we did for 2007 or early 2000, and we look for divergences, especially between buying and selling pressures in between large caps and small caps. What we are really looking for there are signs that the smart money is getting out. We want to see signs that indicate they think there is a top. We just didn’t see that in May. May got all bubbly and sentiment got all bubbly, but we just didn’t see any signs of the smart money stepping back. So we’re looking for that over the next six months, and I think that we are going to see a top and major corrections and a crash that will follow somewhere between August and January. I don’t think that it will last past January, but we certainly have at least one more run up that will go at least into August.
We are going to be looking really carefully over the next six months and then have people get really defensive and wait for the next correction before they invest again. Markets are just too bubbly and we’ve see crash after crash. It’s bubble-crash, bubble-crash. This is not the time to listen to most stock brokers and to just be diversified and sit through this. You don’t want to sit through 2008, or through 2000 and 2002. So we have another one of those coming, from higher highs to lower lows. The next stock crash will be something like 60 percent or more to the downside, so that is not something to sit through. We are just looking for the best time to pull out, and it’s just not right now.
EQ: Is your target still in between 1700-1750 on the S&P 500?
Dent: Yes, around 1720 or a little higher on the S&P 500 and 16,000 on the Dow. The next resistance comes on the Dow, and that’s where we will be deciding whether this is looking like the top. In fact, that may not be a bad place to start selling because even it if goes a little higher, I still think that this move higher only has months, not years left. We see this as the late stage of a bull market, but most analysts on Wall Street—dumb as they are, and I hate to say it—still think that we have four or five years in this rally. There is not a chance in hell on that happening.
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