This podcast series is based on the premise that investors should be allocators.
Not everyone shares that view and giving other viewpoints a fair hearing is the best way to test your convictions, maintain the ability to expand your horizons and learn.
Our guest interviewee is Harry Dent, author of Zero Hour and editor of Economy and Markets.com. His message is that now is not a time for "just re-allocating".
Says Dent: "This is the crash of a lifetime which will turn into, for smart investors and businesses, the sale of a lifetime".
Editors' Note: This is the transcript of the podcast we published Friday. We hope you enjoy this.
Harry Dent, author of Zero Hour and editor of EconomyandMarkets.com, explains why he anticipates the "crash of a lifetime." His message is that now is not a time for "just re-allocating."
In this podcast interview (26:05), Dent discusses the technological, demographic, and geopolitical reasons for a crash he expects to register at no less than 70%. The next three years, he says, is a time to just "get out of the way."
Gil Weinreich: Welcome to the SA for FAs Asset Allocator podcast, a series that addresses the issues of current interests, of financial advisors, including ETFs, asset allocation and the economy. I'm your host, Gil Weinreich, at Seeking Alpha. And today I welcome as our guest, Harry Dent, author of Zero Hour and editor of EconomyandMarkets.com, which employs demographics to project economic trends. Dent currently sees little upside for stocks and lots of downside. We'll ask him why in a moment.
But first, this word on behalf of our sponsor, Invesco: Every day Invesco brings together ideas with technology, data with inspiration and investors with solutions. Let's invest in greater possibilities together. Find out more at Investco.com/together, Invesco Distributors, Inc.
Harry Dent, thank you for joining our show.
Harry Dent: Yeah, nice to be here, Gil.
GW: The pleasure is ours. Let's get right into the current market, Harry. You anticipate a downturn of significant scope. What makes you think that?
HD: Well, there are some very important cycles I've identified over the last 30 years starting with demographic cycles, you mentioned in the intro. Generations spend more money, right up to a predictable point. That was 2007 for the baby boomers. And we've been in a slowdown ever since. And of course, we've had endless money printing to try to prop up the economy, to stop propping up the economy as much as it is financial assets, because to create money and into -- in a normal economy, banks have to lend and there's not as much lending after everybody, consumers and businesses over borrowed in the great boom from 1983 to 2007, which was totally predicted by our demographic indicators for the baby boom spending wave, I call it.
But there are other cycles we have in 2001 the geopolitical cycle which is about 17 to 18 years positive and 17 to 18 years adverse, particularly the price earnings ratios for stocks because of the fair premium. That kicked in with 911. And that cycle has been getting worse ever since and should be bottoming within the next six to twelve months. So that's the one good news, but it's still negative, and we see increasing mass shootings and all this stuff with Iran and Russia and everything else. And that's typical.
But the most important cycle is technologies. That's every 45 years. And every other technology cycle is kind of like, steamships and railroads built into a greater thing together for transportation while electricity and electrical appliances and now computers and internet have built into a supercycle and so we get major bubbles every 90 years and of course, the last one was 1929 and that last was not '29 to '32. So we've been in a demographic decline for many years, money printing to offset. That is largely -- we still have a slow growth, 2% economy, as bad as 1929 to 1940 in the worst time in history. But we have a bigger stock bubble in financial asset bubbles than ever. And I'm saying that's going to burst.
We were basically trying to make new highs but every time we try, we make a slight new high, then we make a bigger new low. That's called the megaphone pattern. I think the broad stock market could be peaking here. I think we could get another scary correction, like September to December last year, and then see one more run with very strong stimulus, and follow through with the Fed and everything that Trump's asked before. But we aren't able to make new highs on most indices. Maybe just the NASDAQ makes a new high and then it's over. So I think we're going to be topping in the first half of next year. And we may have seen basically the best already.
So yes, like you said at the beginning, little upside for stocks, a lot of downside. This is not -- the biggest corrections we've seen in my lifetime were 50% in '73, '74 and 54% for the broad market in 2008 to 2009. I'm looking for 70% to 90% in stocks. Because of the size of the bubble, central banks have not been able to stimulate the economy merely because of lower interest rates like in the past. So they've had to goose financial assets instead. So this is the greatest stock bubble in history. Valuations by some metrics are now as high as they were in the tech bubble. And long term, they're higher than seven out of Asia major tops in the last hundred years.
So we're overvalued. All three of my indicators, the technology, the demographic, the geopolitical, move down together between 2020 and 2022. So the danger period is the next three years. And again this is not a time just to say, oh, I'll just reallocate a bit, and stocks always go to new highs. The last time we had a bubble burst anywhere near this magnitude, 1929, it took stocks 25 years to get back to those levels. And they suffered an 89% decline. That's blue chip stocks like Ford and General Motors and RCA back then, 89% decline. So I'm just saying, look, this is once in a lifetime. I hate to be the bad news bear here. But hey, I was the most bullish guy as anybody knows if they look back in the past. In the late 80s, I was the guy saying this boom would roar until 2007. The 90s would be the best decade in history, and Japan would crash because their baby boom came and bubbled before us. And they were due to crash in the 90s which they did. So demographics are a powerful stuff. But these other cycles are powerful too. And actually this over time, this technology cycle which is peaking now, right here, late 2019. Give or take a year, is the most powerful cycle long term.
GW: Evidently you don't think that the mandarins who run our monetary policy are going to be able to skirt this demographic issue and the weak underlying economy you mentioned?
HD: Yeah, I mean, because they've already gone to extremes beyond anything in history. I mean, Japan's buying their stock market now because they don't have bonds left to buy. Europe's running out of bonds, government and government-related bonds to buy. We have actually been the least of quantitative easing relative to our GDP out of the major powers, and China doesn't print money, although they do through loans down the line. They print condos, they print infrastructures, they just build stuff for nobody, guaranteed by the government. They're going to have the biggest fall of all. They created the most debt compared to their economy in the last three decades.
So everybody's over in debt, demographics are declining, even for China. They're the only emerging country and all the growth in the future demographically is going to be an emerging country. They are the only ones to peak. Their workforce peaked in '19 -- in 2011, and now their rapid migration from rural areas to urban which has been their real growth tool, which they've overstimulated and overbuild for. Those migrants are moving back to the rice paddies because the cities are so expensive, so polluted, so crowded, that they can't stand it anymore.
So their big top-down model is over. China is going to prove to the world for the final time after Russia and some other countries, that top-down planning doesn't work in a bottoms-up information economy. So I can't wait to see China go down. Economists worship them. All they've done is put out an economy on steroids just like Japan did. Japan created a big bubble, and Japan has been down now for 30 years since, and their demographics don't ever point up again. So this is something -- we're looking under the hood, Gil. I don't care what the economy's doing today. Economies look perfect right before they peak and crash, like 1929, or 1989, in Japan, or even late '99, before the tech wreck, and on and on and on.
So I don't look at that stuff. I look at the key fundamentals, and when the turning points are and those things don't lie. The only thing that lies is governments that try to cover it over, and don't take their licks. When you have a bubble burst, a debt bubble, financial asset bubble, you should write-down debts. That's what you do. That's what we did in the 30s. We wrote down private debt massively, and that frees up the economy to grow again. Instead, we just encourage more debt, didn't write down hardly anything. And now most of debts been created in the emerging world, which is more fragile, and is probably going to trigger the next crash, is probably going to be corporate bonds. And some governments in the third world that blow up and then trigger a worldwide debt crisis. Last time it was our subprime crisis that triggered an already due debt crisis to collapse.
GW: I remember how much pain there was when the market was down a little over 50% in 2007, 2008. You're talking 70%. How does an investor protect himself against this?
HD: It's real simple. I mean, you get out of the way. I mean, everything is possible. We're not just talking stocks here. We're in the second real estate bubble. And a lot of people argue to me, well, Harry Real Estate's only slightly higher than it was at the top of the last bubble, and the GDP's higher. So it's not as bad. I'm saying no, fundamental demand, which we measure through demographics is lower. We buy our fundamental indicators on real estate. Real estate is now 40% overvalued in 2006 when it peaked, and we didn't call that in late 2005, by the way, just months ahead of it. Real estate was overvalued, 20%.
Well, in that case, it went down 34% on average, this time I'm expecting 40% to 50%. So the worst pain, Gil is not going to be in stock portfolios, because people can get out of that and the average investor doesn't have as much in stocks as they have in real estate. It's going to be the foreclosures and that -- and mortgages going underwater for the banking system and for consumers. So that's where the most pain was last time. And that's where it's going to be this time even more so bigger, a bigger real estate crash and a bigger stock crash.
Now the good thing is most of my indicators turn back up around 2023. So this is going to be the end of a difficult season that started in 2008. I call it the winter season on my models after a fall bubble boom. And so we should be coming out of this around 2023. But we are in the opposite of the Great Depression where we saw a big crash in deep unemployment on the front end, and then a secondary crash and spike in unemployment and on the back end, we got -- the light went on the front end, we're going to get the heavy one on the back end because we kicked the can down the road with so much quantitative easing.
So the next three years are likely to be the worst you see for the economy, your portfolio, your business, everything for the rest of your life. So just get out of the way. You sell. Real estate is not strategic long term you, you sell your stocks, you get into high-quality bonds, you don't have to go into cash, high-quality treasury bonds, AAA corporate bonds, you can get into cash flow positive real estate rentals do well in downturns. But most everything else, look at 2008 to 2009, asset allocation, it was one of the few times in history where asset allocation did little good because everything went down. The only thing that went up -- including gold and silver went down. Only thing that went up was high-quality bonds and the U.S. dollar. That'll be the same thing this time roughly.
GW: Even according to your model, which projects things will turn up in 2023, there isn't necessarily a reason to get out of the way if somebody has a long-term perspective and just holds on and maybe focuses on using his cash reserves for buying opportunities. So I guess my first question -- this is a two-parter -- is, does somebody really needs to get out of the way? And that's somewhat risky for a long term investor. And then secondly, what would you see investors doing to exploit the coming downturn? Maybe they should just look at it as an opportunity to buy.
HD: Well, first of all, it is the greatest opportunity. General Motors passed Ford for the first time in a heated race for leadership and became not only the number one car company in the world but the number one company in the world between 1930 and 1933 when they passed Ford because they survived the shakeout. They were stronger in marketing, stronger in finance and they were up and coming. So it's an opportunity. For the people like Joseph Kennedy who got out at the top because shoeshine boys were giving him tips and got back in the bottom, he transitioned from being a multi-millionaire to a billionaire in three years by making that move.
Now I'm going to counter what you said earlier, it is the time to get out of the way, if not, to some degree, because stocks will never be the high. We in 1929 we peaked in a long demographics surge upward. Our demographics peaked in 2007 forever, going decades in the future. We'll come back to near those levels in 2036, '37. But the stock market will not be as bubbly this time. I don't think stocks get to these highs in my lifetime or yours or your kids. That's a bold forecast. But that's what my information says. So this is too big a decline. And remember, even in that more positive demographic long picture in the 30s, it took till 1953 for the Dow to get back to that 1929 top. That is not a good thing to sit through.
So you just -- I'm just saying, look stocks by every metric, you look at Schiller's models, and Hussman's [ph] and every good model, there is little -- even those models say you're lucky to not lose 2% without a major crash. Just because stocks are overvalued to extremes, there isn't a lot of gains, and if they are they won't last long. So you're getting giving up games for just two to three years in case I'm right. And I've got way more research. You got anybody with more research about these long term cycles than I do, I'd love to debate them because there isn't one out there. I've debated most of these people.
My stuff is solid. It says there is a high chance you're right. You can't say this is absolutely going to happen or it's going to be 90% or 70%. But everything says this is going to be the worst confluence of downtrend and the biggest bubble burst of our lifetime. All you got to do is get out away for two to three years and if we don't see this by 2023, I'll say, all clear. If we do see this, anything you left in stocks or real estate, you're going to be crying over. That's my message. I don't like to bring this. This is not going to be oh, we have a dip and then three, four, five years later stocks are at new highs. You will not see stocks at this level of we have a big crash for the rest of your lifetime is my forecast.
So get the hell out. I'm sorry. This is a time to be safe and you can be in high-quality bonds that are giving you a 2%, 3%, 4% dividend, better than most stocks and in deflationary times and bubble crashes like this, like the 1930s, the triple A corporate and the Treasury long term treasury bonds of the U.S. doubled in value in that decade while paying you a dividend a better than stocks. So this is not making nothing. It's preserving your wealth, accepting less gains and hoping you miss the biggest crash and now you can reinvest it, areas where you will make a ton of money.
You could have bought anything in 1932, '33 and made money for the rest of your life. Same thing in 1974, '82, and those big crashes. Those are once in a generation crashes. This is once in two-generation crash. That's why I'm saying it's not just another correction. It's not even another deep correction. This is the crash of a lifetime, which will turn into for smart investors and businesses the sale of a lifetime on financial assets and the time to invest more heavily than ever, but that's about three years away give or take by my calculation.
GW: Harry, you've mentioned your calculations, your forecast, your model several times. Can you share with listeners what this is based on?
HD: Yeah, yeah, the generational spinning wave, I came up with, in 1988, I already had it broadly. But I got a more precise indicator, figured out that the average households peaks in spending for the baby boomers back then at age 46. So I moved forward the birth index, which I just for immigrants, births, which I can do with a computer model simply and project that forward. It said boom, the greatest boom in history because the size of the baby boom generation from 1983, till about late 2007, and then a slowdown from 2008 into 2023. And that's exactly what we've seen. Stocks peaked, the economic momentum peaked, right. We thought even after the big tech wreck and all these sort of stuff, and we've been living on quantitative easing in the -- and $16 trillion, globally printed by central banks have only been able to get global growth. I mean, you know, for developed countries 1% to 2% and the U.S. 2%, the lowest in our history.
So that's the demographic model. The geopolitical model, 35-year up and down cycle, which took me a long time to track down and correlate was positive from 1988 through 2000. That was after the '87 crash, before the tech wreck. That would have been the best time in all of history to buy stocks. So you got your demographic model right in its center, the strongest you got the geopolitical model favorable, and then that has been down and will bottom sometime say in early 2020, roughly and turn up. That's the only one to turn up.
The technology cycle is peaking here in late 2019 and will not turn up till 2032. So that's the cycle that will stay down the longest, which means the next boom will have the geopolitical cycle, the demographic cycle behind it, but not the technology as much. So it will not be as strong and the demographics, by the way, are certainly not as strong with millennials as the boom from 1983 to 2007. Those three indicators together, they're all -- they're all pointed up together from 1988 to 2000, the best time in all of history to buy stocks, and they all point down together pretty much from 2020 to 2022-'23. That means the most dangerous time.
These things have not failed in history. Now exactly when it peaks, especially with so much government stimulus and fighting this bubble from bursting, that, yeah, that's a question mark. But the next three years is clearly by my indicators, especially the next two years, the danger zone. 2021 should be the worst year by all of my models, and that's not that far away.
GW: You think that investors should get out of the way. What would you advise corporations to do, the corporation people are currently investing in through their stock shares?
HD: Well, number one could be in the dumb money. Guess who's -- guess who's buying all the net stocks in the last 10 years corporations, large corporations, S&P 500 like corporation, buying their own stocks to leverage slow earnings by reducing flow. They're taking cash flow in good time, buying overinflated stocks, their own stocks. And when those stocks crash their shareholders are going to be saying, well, why don't you buy them now? Oh, we don't have any money. Oh, and now you're in a shakeout to see who's going to survive, like the 1930s and create the winners of the future. And a lot of companies are going to go under or have to merge, oh, where's our cash flow so we can survive the shakeout? Oh, I'm sorry. We used it to buy our stocks in the bubble to increase our earnings per share and increase our bonuses to executive.
So stop buying your own stocks, you idiots. You're being like shoeshine boys. And secondly, hunker down, focus on what you do best. Sell the parts of your business that you're not number one or number two, and can't dominate, cut costs, especially overheads. Somebody is going to survive this shakeout. They always do. And the ones that do are going to magnify their market share faster than any time in history.
General Motors came screaming out of that downturn because they did the best in the shakeout and a lot of companies went under and Ford ended up being number two forever after that. That's huge differences, you got to see it coming. Companies have to hunker down or sell. You can sell your company and investors got to get out of the way and get in safe investments for just a few years. And again, things that do well in deflation, which is high-quality bonds, cash, the dominant currencies like the U.S. dollar, and cash flow, positive rental properties. Those are the things that do well and that's it. Normal -- even in normal downturns like the 70s where many emerging countries did well, commodities did well. Japan was in a very positive demographic cycle in urbanizing, they did well. There were a lot of places to diversify. There are not many places this time around.
So just get the safe stop. If even half of what I say happens, you will be richly rewarded for getting out of the way. By 2023 or late 2022 the deck should start to clear, start to buy back at the sale of a lifetime.
GW: One of the ideas you discussed in your book Zero Hour involves organizing businesses through a network approach. Could you explain this a bit?
HD: Yeah, yeah, my catchphrase is "management is the problem." We're in an age for the first time -- management used to be necessary to concentrate scarce information in the smartest people's hands and have them hand orders down a hierarchy, just like the army and stuff. Well, we're not in that age anymore. Information is getting cheaper and cheaper and better and better. I couldn't have even done my demographic research down to potato chips in every consumer sector before 1981.
So we're in an age where companies that are going to do the best are going to put the most important information in the front lines, customer service, sales people's hands tell them everything about their customers, how the cost and profitability of every product and combination, so they can serve those people customized solutions, at high profit and get a small percentage of those profits instead of some dumb corporate-wide profit-sharing plan that they have nothing to do it.
You put -- you make your decisions on the front lines, you operate from the customer back, you organize around the customers, and everything that can't be put on the front lines or back line servers. Just like in a network, you got your browsers on the front line they can access in real-time back line, experts or systems to get information they need for the customer. And you're making decisions in real-time rapidly at low cost and customizing solutions with no damn bureaucracy and no visible management. The management and bureaucracy, all the left brain rules and thinking and information and profitability and accountability, all that's in the software at live speed. The markets trade every day with no apparent management driven by the users in real time, rapidly and everybody gets instant feedback, whether they make a profit loss on every trade or investment.
That's a real-time network system. Our companies need to move in that direction. All we're doing is streamlining all bureaucracies. And so the CEOs of companies have to go on a show like Undercover Boss to figure out what the hell is going on in the front lines, and they don't have a clue. And if you want to really know what's going on, talk to the back office secretaries, the only way to get a middle class that's richer in the future, rather than poor is to make people entrepreneurs, decision makers on the front lines and let them create profits and reward them, Jack Stack, a guy who turned around decades ago, a manufacturing company in Ohio now has a factory of millionaires. They're not middle class. Most of them are millionaires because she shared profits with people who created profits because he taught them how to make business decisions and how to make money for their customers and for the company.
That's the future. I am -- I left corporate America because you know only entrepreneurial companies are doing this sort of stuff. But everybody's going to have to do it after this shakeout. You can't compete with emerging countries with much lower cost labor and easy to access capital these days unless you're doing something smarter. And automated artificial intelligence only works if it makes everyday people smarter instead of just the rich and the entrepreneurial. That's the secret, make everyday people smart. You know who did that in the last revolution, Henry Ford. Assembly line process took everyday people, focused them on one task, brought the work to them in a logical sequence and made the average worker 10 times more productive. Next thing you know, Henry Ford was selling luxury cars to his factory workers. That's the secret. Management is the problem. We need to get managers, supervisors out of the way and put the information where it needs to be and measure and reward profits on the front line.
GW: Bracing thoughts, perhaps chilling is more apt, certainly provocative. Listeners can go to Harrydent.com to keep posted. Many thanks, Harry, for joining our show.
HD: Yeah, real quick. Yeah, we have a free news daily newsletter. You just put in your email address, and we'll put you on a free newsletter so you can get to know. I know this is radical stuff. But it's simple in essence, so we just like people to get to listen to us for a while. And we're trying to convince you to listen to us instead of the experts because even Warren Buffett's going to be wrong about this one. And that's really bold to say.
GW: That is a bold call. Thanks so much, Harry, for speaking with us. And thank you listeners.