A Look at The Downside of Upsides When Investing in a Boom Market

Harry Dent  |

As stocks continue to run into record highs with seemingly little to no resistance, investors may need to beware of potential triggers that could bring the party to a screeching halt. In Equities.com's latest interview with demographics and economics prognosticator Harry S. Dent, Jr., we discuss new red flags in the global economy, Dent's targets for potential tops in the coming months, and what he thinks will be the big winners of the eventual recovery after the next great crash.

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: You’ve been doing quite a bit of traveling over the past month and one of the conferences was the Demographics School in Arizona. Can you share a few highlights of that event?

Dent: Well, the big thing is Demographics School was initially developed many years ago to attract financial advisors for our advisory network, and it worked very well. We spend a day and a half with attendees and go through our whole body of work from, A to Z. We discuss not just demographics, but S-curve progressions, technologies, and global demographics of emerging countries, which are different. They advance on urbanization even more than demographics, so when you look at emerging countries, they have different metrics than developed countries.

Over the years, the subscribers of our newsletter wanted to go to Demographics School, and they started coming and joining our network. For the first time in our history, we had 80 percent of the audience of Demographic School that were not financial advisors, but high net worth investors and business owners. That was a great thing for us because what we do is basically give them a mini MBA in economics. I tell people that you can take a four-year course in economics for a Master’s degree and still not know much or be able to forecast much. We tell you most of what people need to know about economics in a day and a half.

So in that aspect, it was probably our best Demographics School ever, largely because we got a lot more input from small business owners, entrepreneurs, and high net worth investors instead of just strictly from financial advisors.

EQ: What were some of the major topics that were discussed?

Dent: One of the things is you have to look at the emerging world in the future because it is the future. All the demographics are in the emerging world after this decade of difficulty plays out. The second point is we have major charts around the world hitting these major resistance levels. So this bubble is getting close to peaking.  If we have to estimate when it’s going to peak, it would probably be around the summer.

I also had an old cycle recreated. Ned Davis is a great cycle guy. He documented a four-year political cycle a long time ago, and then a decennial cycle where he averaged out stocks over the last century and found that most of the major lows in the biggest stock crashes happened in the first two to three years of every decade while most of the gains were created in the last five years of every decade. This is a cycle I’ve used for 20 years now. It worked until 2010-2012, when we were expecting the next great crash.

What I found recently is Paul McCulley, who was a major $12-billion fund manager for PIMCO before he retired, came out in Barron’s recently and said, “You know what saved me in the 2000-2002 crash? Sunspot cycles.” I’ve heard about sunspot cycles before from really respected people in the industry, but I disregarded them because it’s an 11-year cycle. I have studied history and have never seen anything correlate on an 11-year cycle. But when Paul McCulley said this, I went back and I looked at the sunspot cycles over the last century. They go back to the 1700s. So if you go back that far, it does average 11 years.

I went back over the last century, and it actually averages out to 10 years, so right on the decennial cycle. So maybe this is the reason. When solar radiation is higher, there is more energy. This is a serious cycle that people in agriculture and NASA track and forecast with because it can knock out satellites and telecommunication systems. So it has some impact, maybe similar to wolves howling to full moons. But I found that it’s a 10-year cycle over the last century, and here’s the twist: It’s a 10-year cycle, but it could range from eight to 10 years.

The last cycle went down longer than usual and is now recovering. NASA and many other experts predict that this one is going to peak in mid-2013, somewhere between May and September. That would explain why we didn’t have a major crash and downturn, and why the sunspot cycle now turns down from about mid-2013 into late 2019 or early 2020. This is right in line with our demographics cycles that are at their worst by 2020, and our geopolitical cycle, which is at its worst by late 2019.

So this just says that the Fed and governments may have kept this bubble going this far, but the demographic trends and geopolitical trends are not getting better. This sunspot cycle, though, is probably the biggest reason I would say that after this year, you better watch out because this is the last of our major cycles to turn down. Then the four-year cycle from Ned Davis bottoms in late 2014 or early 2015, and again in late 2018 or early 2019. Our biggest thing now is we just can’t determine exactly when the bubble is going to peak, and when the biggest crash is, but we’re saying these are the danger periods when we look at all of our long-term and intermediate cycles.

That’s important for investors because we may be in a long-term downturn, but stocks go up and down. So every time there’s a crash, you have to have the guts to buy when things are at decent valuations. Every time there’s a bubble and things go back to new highs like they are now, you have to have the guts to get out even if you get out a little too early. When things crash, it gets really ugly. We saw what happened in late 2008, and the only thing that went up was the dollar and U.S. Treasury bonds.

Well, I’m not sure Treasury bonds will hold up in the next crash, but I think the dollar should be able to. Everything else will collapse. We’re in tumultuous times, and we’re going to see bubble, burst, bubble burst until we get out of this “Winter season” and move into the next global boom, which will be led more by emerging countries and commodities in the early 2020s.

Lawsuits: Twitter Settles Class Action for $809.5 Million Over Providing Misleading Information to Investors

For now, I think commodities are down for the next decade, and I don’t even like most emerging countries. I do like Mexico if there’s a crash because they’ll be a major manufacturer. I like India because they’re not dependent on commodity exports like many other emerging countries. I like Southeast Asia too. I don’t like emerging markets like Latin America, the Middle East, or African countries in a time when commodity prices are going down. You have to be very selective, but if we have another crash, that would also mean we’ll have another big rally.

EQ: Where can people get more information about the most recent Demographics School?

Dent: If people go to HarryDent.com, we now have a free daily newsletter with high content that’s not as much market forecast, but focused more on education content and current events. That’s for free. If you go to HSDent.com, we sell an audio version of Demographics School for people that couldn’t come. Those are the two things I would recommend right now. Get on our free newsletter because you can’t go wrong with that, and if you’re interested in Demographics School and a broader view of what we do, go to HSDent.com.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

Market Movers

Sponsored Financial Content