In our latest interview with demographics and economics prognosticator Harry S. Dent, Jr., the focus is on the new all-time highs for stocks. While the Dow Jones Industrial Average is already hitting new marks, the S&P 500 is within striking distance of breaking through the 1565 level, which is the record set in October 2009. As bearish as he’s known to be, Dent does believe stocks will be able to establish new heights, but the overall direction of the market does not look too promising for the bulls.
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: Despite the negative news regarding headlines like the sequestration deadline and China curbing its real estate bubble, stocks continue to push higher into new all-time highs anyway. Is this an encouraging or should alarm bells be going off for investors?
Dent: I would say it’s alarming. The market just wants to go up, and I’ve always called it the market on crack. It’s being fueled by endless injections of money into the financial system, super low rates that tell people that they have to get into risk assets like stocks because they have nowhere else to go. The nature of the stock market in recent years is, unless there’s really bad news–like a real showdown in Washington, which we could see in the next month or two over the debt ceiling, or a real bad problem in Europe–then the market will just keep edging up.
It ignores the risk and bad news because it doesn’t have any choice. You either make zero, which is negative 2 percent in real terms on a “safe” T-bills, or you buy stocks or commodities and hope they keep going up. So this is alarming, and what we keep telling people is we don’t see signs of a major top here yet. We don’t see the type of divergences of buying and selling pressure, or between large and small cap stocks that suggests that the dumb money is fully piling in while the smart money is starting to exit. But there are some signs of that, and we tend to think this is what we call the top before the top. In other words, we get a top here a little higher, and then we see an 8 to 10 percent correction like we saw in the middle of 2007, and then you see a final rally that just barely makes a new high, and then you see divergences. That’s our expectations.
There is very strong resistance above the new high in Dow Jones Industrial Average, but the key resistance is on the S&P 500’s slight new high around 1600. That’s the first major index in the U.S. to hit a trendline through the tops of the past two bubbles of 2000 and 2007. That’s the megaphone pattern where you get higher highs on each bubble, then lower lows on each crash. That suggests to us that later this year, maybe the summer, we see a final rally that takes us to that 1600 level and then somewhere down the road, the targets of 5000 to 6000. This is worrisome, but at the same time, it’s just totally typical. A market on crack wants more crack, and as long as central bankers keep rates low and keep pumping money in, the markets will find an excuse to go up.
EQ: As expected, there are a lot of headlines about whether stocks can continue higher now. As bearish as you are for the longer term, you actually think they still have room to go up right now, correct?
Dent: If I had to make my best guess, and it’s always a guess when you’re talking about short term, but we go a little higher here to 1565, which is the old closing high. Then, we see more of a 7 to 10 percent correction, followed by a final rally to 1600, and that will be time for people to get out of stocks. But I tell a lot of investors, if that’s the scenario, then why wouldn’t you start selling stocks here on this rally because who would want to sit on an 8 to 10 percent correction just for a small possible upside here if things go to 1600? I think this present time frame, especially as we get toward 1565, I would say that it’s a good time to sell stocks, even for longer-term investors.
EQ: You recently wrote about why Echo Boomers, despite being larger than the Baby Boomers, they’re not going to stop our economy from falling over the demographics cliff. What are some main differences between the two large generations that most people miss when analyzing that transition?
Dent: First of all, while it may be true that the echo boom is as large or larger than the baby boom, but it’s spread out over a longer period of time. The amplitude of the Baby Boomer generation wave—the rise of births, especially when you include immigrants—is larger than the Echo Boom. The Echo Boom never gets us up to as many peak spenders, borrowers, buyers of homes, investors, innovators and everything that drives an economy, at one time. From the our view, the biggest single thing to understand in the world today in demographics—and Japan has already proven this—this is the first time in modern history where we’ve seen a smaller generation follow a smaller one. From our view, the Echo Boom generation is actually smaller because they never get to as many people doing anything at the same time. So you’re never going to need more housing, and in fact, you’re going to start to see older Baby Boomers dying at a faster rate than younger Echo Boomers buying homes at some point. What does that do to home prices and the net demand for homes? It’s terrible, and Japan is already seeing the stock market fall off and on for 23 years. Their real estate market has gone over 20 years without significant bounces.
The next generation is supposed to come along, when it does–and it already has in Japan, they’re already in their echo boom generation–they’re supposed to come along and drive up their economy and housing. But when older people are dying faster than younger people are buying, it changes the dynamic. So I think, especially in real estate, we will never see prices at the levels they are in the U.S., or Japan, or other major countries that are peaking or have peaked. Stock markets will have another extended boom in the future, but it won’t be as strong as the boom that we saw from 1982 to 2007. In the U.S., as we’re aging and in most developed countries, and with this smaller generation driving the next boom over a much more extended period of time, we’re not going to see a stock market boom like we from 1982 to 2007. We’ll see it boom, and it won’t really start until the early 2020s, but it won’t be like that.
EQ: Does that support the notion of a new normal in which the economy and the market is much more stabilized but with much more muted growth?
Dent: Yes, we look at generation cycles and it was always the creative individualist generations like the baby boomers and then the more conformist ones that follow, like the Bob Hope generation that came after the Henry Ford generation. Those generations tend to be more stable. In the next decade where demographic trends are actually negative, we’ll have average that’s closer to zero growth for the economy. When we get to the next boom, it will resemble more like what we’re experiencing right now without the stimulus. We’ll have probably more like 2-percent growth instead of 3 to 4-percent growth. It’s going to be a different dynamic, and the only thing that can change that is if we get a major breakthrough in technology. That’s the wildcard. This will happen at some point, where people live substantially longer and have kids later and work much longer and a lot of other things. That might bring a level of productivity to augment the next boom, but on demographics alone, everything’s going to be less volatile but also lower growth.
If you go back to the ‘40s, ‘50s, and ‘60s boom, with the last generation, you never saw stocks correct more than 20 percent. Well, we saw a 40-percent crash in 1987, then a 50-percent crash in ’00-’02, and then another 50-percent crash in ’08-’09, and we probably have a 60-percent crash somewhere ahead of us before this whole crisis is over. So bubble boom, bubble burst.
EQ: Another interesting point you made was that innovation was declining during this current cycle. Despite technology being so predominant in our lives right now, has this wave of innovation matured?
Dent: It has for now. Social networking will improve, iPads and iPhones and Samsung, whatever, will also improve. But everybody has a smartphone now; everybody has wireless internet or broadband available; everybody has a computer. This wave has crested. We’ll get another wave of technology that’s building on nanotechnologies, robotics, biotech, alternative energy, and tons of things that are incubating now in niche markets. These will move mainstream just like the way the internet and smartphones did. They’ll move into the mainstream in the next boom of the 2020s and 2030s, and they’ll augment productivity, but for now, technologies are probably going to slow down. I think we’ve seen the best of this for now.
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