Equities.com recently spoke with demographics and economics prognosticator Harry S. Dent, Jr., to discuss the market's recent pullback and what he believes will be the triggers of the next correction. 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 www.harrydent.com.
EQ: Stocks started off 2014 with a small pullback but was able to recover in the following weeks. Do you think the stock market has stabilized from that recent dip or do you see a big breakdown in the near future?
Dent: We’ve been looking for a top in the markets sometime between late first quarter and early second quarter, and then for the economy to get substantially weaker into the summer. So far, that seems to be playing out. We have a seven-quarter stimulus cycle, and meanwhile all these the economists keep coming on TV saying, “Oh, we have a sustainable recovery now.” Well, I don’t think so. Over and over again we get a slowdown, they step up QE1 to QE2, then to QE3. So we get three or maybe four quarters of rising growth, but then it flops right back down to zero, and we go in recession.
So these are not sustainable recoveries. Stimulus is just borrowing from the future. It is artificial, and it’s not real growth in incomes and in borrowing and in new capacity with businesses. This is not a normal recovery. So that’s what we’re seeing. We saw a peak after three quarters of growth. That was the first, second, and third quarter of 2013. It looks like GDP peaked at about 4.1 percent quarterly growth. But we came in at 2.2 in the fourth quarter.
It certainly looks on the weak side of the first quarter, and everybody is blaming this on weather but I think that’s overstated. But even if we get some bounce in the second quarter from better weather, I’m quite convinced with the statistics that we’re going to go back to 4.1 percent at the highest. So it looks like this cycle has peaked again and if this continues, we’ll probably see slower growth.
EQ: The Fed has started their tapering strategy now, drawing down their stimulus program. What are some effects that you think that will have on the economy and markets?
Dent: We’ve been worrying that we might get some late-stage inflation because we have an inflation indicator that’s a 2.5-year lag on workforce growth, and that says that even though the economy is slowing here, inflation actually might go up this year. So that would be a real conundrum, and kind of a checkmate for the Fed. The economy is slowing and if it keeps slowing, they’re most likely going to try to stimulate again or at least stop this tapering. But if inflation is rising, that’s going to be harder to justify. So we think the Fed is just getting checkmated here after five years of endless stimulus.
But the biggest thing we’re looking at, and continue to look at is that there’s a vicious cycle with commodity prices. World trade slowing and commodity prices are slowing, and that’s hurting emerging counties, which are now the biggest customers of China. They’re even bigger than Europe and the United States put together. China’s exports will slow more as a result, since they buy a lot of the commodities around the world for their manufacturing machines, commodity prices will drop. It’s a vicious cycle.
EQ: China’s export growth in February showed a considerable drop. That supports your belief that there’s a slowdown in effect.
Dent: Yes, we just saw a report for Chinese export growth in February, and it dropped 18 percent. It was already slightly negative. So it’s like falling like we were in 2008-2009 and everybody is like, “Oh, China is going to grow 7 or 8 percent, and China is coming up.” Well we don’t think so and we think the bursting of the China bubble is coming. Governments and central banks around the world are all poised to stimulate more. If there’s any signs of slow down and if the stock market starts to go down too much, they’ve basically all agreed to up the stimulus.
I think Europe is about to come up with another round of stimulus. And the U.S. is tapering, but they’re probably going to have to stop pretty soon and they may even have to reverse course. But I think it could be too late.
It’s kind of like the Japanese in the late ‘80s. They were the up-and-coming second largest economy in the world. They had a big bubble in real estate and stocks, all that wealth allowed the Japanese to go around and buy companies and buy real estate in places like Australia and Singapore and California and New York. But then when their bubble burst, their wealth imploded.
Well China has a bigger bubble, especially in real estate. The top 10 percent of the Chinese account for 85 percent of the wealth, 60 percent of the income, and probably 50 percent of the spending. The Chinese save way more than we do in the U.S., and they invest way more in real estate, stocks and bonds and in things like that. So I think there will be an implosion in Chinese wealth.
EQ: What kind of effect will that have on the rest of the world?
Dent: I was just in Australia for three weeks lecturing, and basically everybody agrees that what’s holding up their stock market is Chinese bonds. Rich Chinese are fleeing their country, which is not a good sign because they’re scared that when this bubble bursts, the government is going to confiscate a lot of their wealth. They have high pollution and they want their kids to get an English education somewhere like Sydney, Vancouver, San Francisco, New York or London, and that’s where they go. So they’re bidding up in some of these cities that are still bubbling, especially cities like Vancouver, Sydney and Melbourne. That’s a high impact of foreign buyers in these areas, especially from the Chinese.
I think China is going to be the biggest bubble to burst because the typical large city in China is 30 times income. Since the early 2000s, bubbles that have gone up five to six times. When our bubble went up here it was 107 percent, and Japan’s was 160 percent. The Spain bubble went up about I think 140 percent. These are big bubbles in the developed world, but in an emerging world they’re way larger at 5, 6, or 7 times when real estate has gone up in key cities.
EQ: What are some other economies that pose a concern to global economic stability?
Dent: We’re forecasting two big surprises for over the next several years that people aren’t going to expect. The first is that the China bubble is going to burst, and it’s not going to be a soft landing. You don’t have a bubble that big, with that much government-driven debt and over-building and not have a big cut. There’s no way to turn that in a soft landing.
Second, Germany to us looks just like Japan in 1989. We said Japan was going to fall, but at the time they looked at the top of their game, and everybody thought they were going to take over the world. If you look at Germany, it actually has a worse demographic cliff, and is facing a slowdown from demographic spending worse than any country in the world. I mean, most of Europe has this but Germany will go down the hardest. Meanwhile, everybody is looking for Germany to hold up the European Union.
So those are the two surprises. The next downturn will be triggered by more weakness in Germany and the Chinese bubble bursting. We already have weakness in southern Europe, and then the U.S. real estate recovery is already showing signs of being worn-out because it’s mostly speculation. And with interest rates rising, and the fact that the economic growth looking like it’s slowing, that’s not likely to be strong.
So we think the bubble will burst this year and I’m looking probably somewhere between early April and early May for a peak in the stock market. I’d like to see one more correction and then one more move to new highs, around 17000 on the Dow then I think we’re going to tell people get out.