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Stocks Don’t Come Back From Bubbles Likes These

In's latest interview with demographics and economics prognosticator Harry S. Dent, Jr., we get Harry's take on game-changing industries, the crash ahead, and how investors

In's latest interview with demographics and economics prognosticator Harry S. Dent, Jr., we get Harry's take on game-changing industries, the crash ahead, and how investors can protect themselves in a deflationary environment. 

Dent's latest book, Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019 came out earlier this year.

He is also the editor of the free newsletter Survive and Prosper. You can read our previous interviews with Dent here, and learn more about his work at

EQ: In our last interview, you mentioned that we've pretty much maxed out the internet revolution and its impact on economic growth. In order for us to experience that kind of economic boom again, we would need new technologies. Do you see any industries on the horizon that might be able to spark another revolution or boom?

Dent: I don’t think we’ve seen the big breakthroughs in alternative energies yet, but I think it’s going to come, especially when oil prices go higher. Fracking has been at least a minor revolution. It’s been a major revolution in the United States, but it’s a minor revolution for the world. But even fracking doesn’t work so well.

The biggest revolutions will be the things that will extend our life expectancy. If we can live longer, work longer, then we won’t have these giant entitlement problems, and we won’t have workforce growth and population growth slowing so rapidly in some of the countries around the world.

The demographic trends are hard for most of the developed world. We’re in the middle, I call us “sustainers.” The US, UK, France, Denmark, and other countries like that have echo booms and demographics that go more sideways for the coming decade. But there’s this small number of countries, including Australia, New Zealand, Norway, Sweden, and Switzerland who actually have a larger echo boom and rising demographics after this downturn.

But most countries in Europe, Eastern Europe, Russia, East Asia and now China are decliners. They have substantially smaller generations or no echo boom generations to come. So they just have falling workforces, shrinking demographics and declining spending trends for decades to come. I mean if something doesn’t happen to change our life expectancies more dramatically, I think that’s going to happen.

EQ: When you talk about industries that have the potential to extend our life expectancies, what are some examples of these technologies?

Dent: Biotech, robotics and nanotechnologies are the type of things I mean. You can have nanobots 20 years from now that clean out your arteries. You can have nanobots that clean up the atmosphere and CO2. Nanotechnology could make energy out of molecules in thin air instead of having to dig it up out of the ground with such highly polluting effects.

So I think you’re going to see bigger breakthroughs but we’ve already seen them for now. We’re seeing the maturity of the information revolution and the revolution of in biotech. Nanotechnology is coming, but it’s going to take a decade to maybe start moving into the mainstream, and then it will take another decade and a half or more to actually move into the mainstream. So we won’t feel the impact of that for a while.

Meanwhile, the stock market doesn’t understand how this works. Technologies come in on an S Curve. While the current wave of technologies mature, a new one emerges and then shoots up again. There’s surges in technology just like TV and cable and airline travel, and so on. You get these surges like automobiles, phones, electricity in the early 1900s and early ‘20s. Those are important and the markets just don’t get that.

They just look at earnings and interest rates and government policies and past trends and future forecasting. That’s why economists almost never see a downturn coming. Nobody saw the fall of Japan. We saw it 100-percent clear. Nothing could be more obvious to us than in the ‘90s that Japan was going to take a big fall, and the U.S. and Europe and other western countries were going to have the best decade in a long time.

EQ: How would longer life expectancy through these new technologies and new industries affect a country’s population in terms of productivity?

Dent: Well, first of all, you need to consider the two biggest trends we have. After their late 40s, people in most countries tend to spend less because their kids leave the nest. The second thing is they retire around their early-to-mid 60s. So now they’re not only spending less, they’re not even working and contributing to the economy, or even paying into the entitlement systems anymore. They’re just taking. They’re “takers,” as the Republicans call them.

Life expectancy in the U.S. is 79. The highest is Japan at 84, and the typical Western European countries is about 81.

So what if we live to be 100? Let’s say we worked until we were 85, and then retired. We would have about 15 or 20 years in retirement. That means we would be working 60 something years before retiring, instead of working 40 something years, which we’re doing now.

You can’t work for 40 years and then retire for 20-25 years. We’re working for 42 years on average and then we’re retiring for 21. The average person retires at 63, and if they make it to that age, they end up living to be about 85. So you can’t work 42 years and then retire at 21 with the kinds of salaries and pensions and social security and healthcare benefits that we have in place right now. That’s not even remotely feasible. And then it’s even less feasible when there’s less young people coming down the pipe to pay for more old people. This is the first aging society we’ve had in history.

This entitlement thing is huge. We need to work longer and contribute longer to keep our workforce productive enough.

I’ve shown some graphs in recent newsletters of Germany and Japan, which have the fastest aging populations. If they could just transition over the next 15 years to retiring at 75 instead of 65, their workforce would grow instead of slow. Eventually it would decline but they’d put it off for probably 20 years just by doing that.

EQ: So the general perception or the idea of what retirement should look like has been off-base?

Dent: Right, and you need a reality check. People need to realize we can’t afford to retire; that our entitlements are unaffordable. People kind of know that today but they don’t fully realize it. Economists make these rosy projections and then we get a downturn, and then people have to get real.

These entitlements are going to be more of a burden than they are being projected. There’s going to be less young people than they think because immigration is going to drop and births are going to drop. These tend to drop during a downturn. In fact, they’re already dropping in the U.S. Births are dropping, immigration’s down half already and we’re not having a big crisis yet from our point of view. So there’s some realities that are going to hit and the markets don’t understand it. The economists have no clue. The way they get a clue is if the economy teaches them hard lessons.

EQ: Looking at your targets, you believe that the Dow is heading to 17000 and then falling to 6000 by 2016. Do you see that as more of a two-year slide down?

Dent: It’ll be a two-to-three year slide down. If you look at every major bubble burst in stocks, the longest one was late ’29 to late ’32, almost three years. The tech wreck was 2.5 years from early 2000 to late 2002. The last one, which was hit by massive stimulus, was only a year and a half. So it takes at least a year and a half.

It’s really more of a full deleveraging like the early 1930s. So I see this going well into 2016 as the most likely forecast. And then it’s still not over. There will be a bounce and then there will be a second wave that may or may not hit new lows, but I would like to see stocks at 3800 or below on the Dow by the end of this decade to feel like this bubble is fully deleveraged. Bubbles go back to where they burst or lower, and 3800 is where the bubble started.

EQ: From you there, you’ve said that you think it’s going to be a decade of volatility to follow.

Dent: Yes, and the worst is going to hit in the next six years by our cycles, and then the worst of that is going to likely hit in the next two to three years. That’s what we’re looking at. The good thing about this is with our cycles being so strong, if this is going to happen, it should start this year and we should know by late this year whether we’re getting in trouble or not. If we don’t see anything but a 10 or 15-percent correction and the governments keep things all nice and fine, then we’ll know that somehow they’re preventing this again.

I don’t think they have the capacity to prevent it this time. I think they’ve shot their wad, but we should know by late this year. If we see a correction of over 20 percent, then we know we’re in new territory.

EQ: In the past investors have looked at gold as a safe haven when stocks have corrected. Do you believe that correlation still exists?

Dent: No, and that’s because we’re moving into a deflationary period. During inflation, it’s a great hedge like it was in the ‘70s. We have deflation as the trend now and that’s why governments are stimulating so massively. If this recovery does fail then we’re going to see more debt deleveraging and debt deleveraging is deflationary.

We’re going to see financial asset bubbles burst. That’s wealth disappearing just like money disappearing when debts get written off. That destroys money and less money chasing the same goods equals deflation. Gold has been expecting inflation from escalating money printing. And we have seen escalating money printing, but we haven’t seen escalating inflation. That’s why gold started to collapse in 2013. People realized that the U.S. upped the ante with QE Infinity and then Japan came in and tripled their stimulus, and inflation fell! That’s when the markets finally understood what we’ve been saying for years.

Gold is going to go down. It went up a little recently, then came back down, but it’s going to go down in a crisis and that’s what it did in 2008. When the crisis finally hit in the second half of 2008, and banks like Lehman Brothers started going down, gold fell 33 percent. Silver went down 50 percent. They did not protect you.

EQ: If you’re a young investor, you can take advantage of opportunities after the crash, but if you’re a baby boomer and you’re facing retirement, is there anything you can do at all at this point?

Dent: Just get safe. Bubbles are going to burst, and everything is going to go down. That’s what happened in 2008 and that’s why stockbrokers are going to be wrong about this too. They tell people, “Well you diversify, just hang in there, and stay the course.” No, after bubbles burst like this, stocks don’t come back. If you look at 1929 to 1953, it took 24 years to get back from an 87-percent crash. It was the same thing in late ’68. If you bought stocks at the top, it would have taken 25 years to get even in 1993. This is not something to hold through.

EQ: So in a deflationary environment, are bonds and the dollar where you want to be?

Dent: Yes, high-quality short-term government bonds. You don’t even want corporate bonds. You just want to preserve your money. Don’t go looking for yields. If you get a little yield, that’s fine but don’t reach for it. You want to preserve your money from what could be a 60 to 70-percent crash in stocks in a matter of years. Real estate is going down further, and so is gold and commodities.

Preserve your money, and then you buy at 20, 30, or 40 cents on the dollar. That’s the trick to deflation. You don’t have to make returns, you just preserve your gains in a bubble. Keep your capital safe and then you re-buy after the crash. We got very clear targets for this crash.

If we saw the Dow between 5000 and 6000 a couple of years from now, we’d say it’s time to buy again. If we don’t see that, we’ll say we’ll wait.

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