The Gold Report: Your book, "The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014–2019," predicted a great deflation based on demographic trends. Were you surprised by the strong stock market over the last year?
Harry Dent: Yes, I was. I'm always surprised. Bubbles go and go until they suck everybody in. It's been this way all throughout history. This is a bubble. It looks like a bubble, quacks like a bubble and tracks every bubble in history. It's going to burst, but we continue to have outside influences propping it up. The Federal Reserve announced tapering of quantitative easing, but then the Bank of Japan and the European Central Bank stepped up their bond buying, and the markets are eating it up.
I actually think we're probably not going to peak until early next year, perhaps around March, with the Dow Jones Industrial Average as high as 19,000. There are certain indicators we look for at a top. One we have already seen is small caps underperforming large caps without making new highs. That is one classic indicator. Another one is selling pressure increasing in a final rally, which shows you the smart money is leaving. That did not happen in this recent rally, as sharp as it was and as crazy as it looked. I call this the "markets on crack."
Bubbles act like grains of sands dropped on the floor. They form a mound that gets steeper and steeper until at some point one grain of sand causes an avalanche. Something is going to happen here that governments can't respond to and control. Germany keeps weakening. China is showing signs of unraveling and cracking, but it hasn't totally burst. . .yet.
This market is not going to crash 10% or 20%. It's going to crash worse than it did in 2008 and 2001 and 1930 and 1973. This is going to be the biggest crash ever.
TGR: What are the indicators that are warning you about this crash?
HD: We always look at demographics. The demographics for spending in Japan peaked in 1989 and pointed down in the 1990s. That was the indicator that Japan was going to have a tough decade. Germany is in an even worse predicament. It underperformed this year and will keep underperforming. That country has the steepest downtrend in demographic spending patterns of any country in the world, especially between 2014 and 2022. It is the second fastest aging country in the world. To make it worse, Germany is holding up Europe's economy at the moment. What happens to bailout efforts of the already weak countries if Germany keeps declining? China's housing bubble is cracking. Developers are discounting and the government is still encouraging overbuilding.
We are also looking at demographics in the U.S. The average age of 46 for peak baby boomer spending occurred in 2007. That plateaus until the average age of 53 and causes demographic headwinds. We're hitting that final plateau this year, 2014. That's why the governments are stimulating at such unprecedented rates, just to get 2% growth on average. I am predicting that car sales are going to start to plummet next year, and the more affluent people who peak later are going to start spending less. Next year, 2015, will be a weaker year than the markets are expecting.
TGR: In the U.S. today, the official unemployment rate is close to 5.9%, but some, including John Williams at Shadow Stats, peg it closer to 23%. What's happening in the U.S. economy, and is it part of what you call the Great American Reset?
HD: If you adjust for the decline in workforce participation, we're still closer to 11%. John Williams is probably including underemployment and full-time-optimized people taking part-time jobs. The bottom line is that the job market is worse than the figures tell. Of course, the government is not going to tell anybody that because it wants to keep confidence up. It seems to be working. That is why I call this the "markets on crack." The markets ignore bad news. They don't look very deeply as long as the Fed keeps supporting the markets and holding interest rates at essentially zero short term. It is creating free money and convincing the markets that the economy can't fail.
There is recent proof that is not the case. Japan's economy failed in the early 1990s when its demographics turned down sharply, even through the rest of the world boomed. I don't think governments will be able to fight this next demographic decline. Debt is at unprecedented levels in almost all countries around the world. China has two to three times the debt that an emerging country, with its standard of living, normally has. We're in the greatest debt bubble in history. You can't keep growing when debt is growing and global growth is slowing. At some point, a grain of sand is going to break this thing. Something's going to go wrong, and the markets are going to realize the future doesn't look rosy and you can't get something for nothing. We're not going to get a sustainable recovery by creating money out of thin air.
TGR: What does the Great American Reset feel like when you're living through it?
HD: It is painful. That is why governments are fighting so hard to avoid a reset. Debt bubbles like the one we experienced in the early 1900s cause financial asset bubbles in stocks and real estate and commodities. Then, at some point, they burst and cause a reset. Stocks tend to go down 80% on average. That's what they've been down in Japan. Real estate went down 60% in Japan. Imagine your house going down 60% and not bouncing back for 24 years. That is what is happening now in Japan. Unemployment goes to the highest levels we'll see in a lifetime. It hit 25% in the Great Depression in the U.S.
These resets are very painful, but they're necessary. Unless financial assets come down, young people can't invest for the future. Unless we burst this education and healthcare bubble, people aren't going to be able to afford doctors or school in the future. Unless we reset entitlements so we retire later, there's no way we can afford what's been promised. Unless real estate goes back down to pre-bubble levels, and that is still 40% lower than where we are in this bounce, then young families aren't going to be able to afford houses.
We need this reset, but it is incredibly painful. Deflation is the reset. It is like a financial detox. Detox is painful. That is why it is important to get liquid, lock in your job and hunker down. Those who take this advice ahead of everybody else will do well. They will benefit from this reset. But most people will just go off the cliff and not know what the hell happened.
TGR: When we talked in January, you pointed to Australia as the golden country because of its low debt-to-GDP ratio and possible population growth through immigration. What impact are lower resource prices having on a country where mining is responsible for almost 20% of the economy?
HD: Australia is a great place. It has low debt, low crime and a civil society. It has the strongest demographics because of high-quality immigration from Asia, and is one of the few countries with a bigger echo baby boom than the baby boom. But there are two challenges looming. The first is high trade with China, a country that is going to blow bigger than any country in modern history. That will affect Australia, which already has a real estate bubble that is as big as any Western country, except for England. The other negative is commodity prices. The Australian stock market is 20% off its highs, almost the same percent that commodities are off their highs right now. Commodities are Australia's Achilles' heel. Still, I consider it the best place to live in a crisis. It will come out of this stronger than most countries, but it also will feel the next downturn much more than the last one because of China and commodity prices.
TGR: Your predictions are largely based on demographics. I recently interviewed Frank Holmes from U.S. Global Investors, and he pointed out that in the emerging world, 100 million people are having sex right now, and in nine months that will mean one million screaming babies who will consume three million pounds of minerals, metals and fuels each in their lifetimes. Wouldn't that be a positive demographic statistic for natural resources demand?
HD: You would sure think so, but the question is when. The positive demographics of many emerging countries won't peak for 20 years or more. India will peak 50 years from now, and some countries in Africa could reach their highs 80 years from now. Having babies is good. But emerging countries are largely commodity exporters and their economies follow the developed countries. They don't lead them. When we go down, they go down more. In the 2008 crash, despite all these positive demographic trends, the emerging markets crashed more than the U.S. market. The Emerging Markets Index went down 65%. I'm positive about emerging markets longer term, but we have to get over this worldwide downturn.
We are projecting that commodity prices are going to go much lower in the next several years. Commodity prices peak like clockwork every 30 years, and then go down for 10 to 15 years or more. We're in a downward cycle that doesn't bottom out until around 2023.
TGR: You predicted that while gold could return to $1,400 an ounce ($1,400/oz), it could also go as low as $700/oz. Is that still a possibility? And, if that were to happen, wouldn't mines just close and there'd be no new gold entering the market?
HD: I think gold is extremely oversold right now. People are very bearish on it after the recent fall, but this isn't the time to panic and sell. It is due for a bounce back up to $1,300/oz or even $1,400/oz. That would be the time to lighten up before it goes down again. I think gold is ultimately going to hit somewhere between $250/oz and $400/oz. I just think the next major stop is $700/oz. I think silver is going to hit $5–10/oz before it comes up again.
People bought gold because central banks were printing money like drunken sailors and they reasoned that would cause inflation. But when the global financial bubble bursts, that destroys money, creates deflation and is bad for commodity prices and gold.
TGR: What are your predictions for uranium and oil?
HD: We see commodity prices in general going down over the next several years. Oil is going to hit $10–20 a barrel. It's not going to stay there. I think oil is also extremely oversold here and is probably due for a bounce. But I would not want to be long oil or uranium over the next several years.
TGR: How can investors survive or even prosper during all of this mayhem?
HD: The best thing is to get liquid. Sell real estate that is not critical to your business or that you don't want to live in forever because real estate is going to go down again. If you've got a mortgage, it's going to be really painful. Sell stocks and risk assets and commodities. Focus on cash, safe securities, some shorts if you want to take some risk or hedge some dividend stocks, and long the U.S. dollar versus the major currencies in the world. That's the way to make money in volatile times. I just like having cash and sleeping. This way I can be totally objective, so when the next bubble bursts, which I think is very likely to happen in the next two years, I can step in with a clear mind and buy the emerging markets, like India and Southeast Asia and then Mexico, maybe even Turkey.
A good bet based on demographics would also be the healthcare sectors—medical devices, biotech and things that benefit from the aging of the baby boomers. Once there's a crash and the stock valuations go down, you'll have the cash to buy whatever you want.
TGR: Thanks for your time.
Harry S. Dent Jr. is founder of Dent Research, an economic research firm specializing in demographic trends, and editor of the Economy & Markets and Boom and Bust newsletters. His mission is "Helping People Understand Change." Dent is also a bestselling author. In his book, "The Great Boom Ahead," he stood virtually alone in accurately forecasting the unanticipated boom of the 1990s and the continued expansion into 2007. In his new book, "The Demographic Cliff," he continues to educate audiences about his predictions for the next great depression, especially between 2014 and 2019, which he has been forecasting now for 20 years. Dent regularly lends his economic expertise to the media on television, in print, and on the radio, and is sought after as a panelist and speaker for international forums around the world. He earned his master's degree in business administration from Harvard Business School, where he was a Baker Scholar. Subscribe to the free daily Economy & Markets newsletter at harrydent.com.
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