AMA 23 – Harry Dent’s Outlook on Demographics, Debt, and Inflation

harry dent

Narrator: Welcome to the American Monetary Associations Podcast where we explore how monetary policy impacts the real lives of real people and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman: Welcome to the podcast for the American Monetary Associations Podcast. This is your host, Jason Hartman, and this is a service of my private foundation, The Jason Hartman Foundation. Today we have a great interview for you. So I think you’ll enjoy it. And comment on our website or our blog posts. We have a lot of resources there for you. That’s or the website for the foundation which is Thanks so much for listening and please visit our website and enjoy our extensive blog and all our resources there.

Start of Interview with Harry Dent

Jason Hartman: It’s really my pleasure to interview Harry Dent on the show. He is a fantastic author and prognosticator that I have been following for must be almost 15 years now. And Harry Dent has really been sort of a god of the financial services industry. He, years ago, back in early 2000s people were listening to his predications with bated breath. I mean, he was the guru of Wall Street. And he’s written several bestselling books. I believe the first book of his I read was The Great Boom Ahead and I think that was published around 1995 or so. And then I read The Roaring 2000s and The Roaring 2000s Investor. I believe his last book was The Great Boom Bubble. And his next book, aptly enough, is entitled The Great Depression Ahead.

So, again, I want to just stress to all of our listeners, there’s a lot of negative news out there, and you know what, I mostly agree with it. I think our economy is in a mess, a huge mess. But every crisis is an opportunity and there are loads of opportunities out there right now. Okay, one more comment about Harry Dent. I was really glad to interview him, love his work. He made some predictions, many of which came true, I mean the guy has just an impressive track record. One that didn’t come through, and I did ask him about this, was when he predicted the DOW would come to 30,000, and of course that didn’t even get anywhere close. But he explains that in the interview and I think you’ll really enjoy the interview.

Again, Mr. Dent, just like so many commentators, really virtually all of them, tends to view housing as a national market. And it’s funny, when you ask all of these experts about the real estate market or the housing market, they paint it with a broad brush. But as soon as you then ask them what about Texas versus California or North Carolina versus California or North Carolina versus Florida, they say oh well of course, those are much better markets. So you have to kind of dig a little deeper when talking to all of these experts to really see what they think because if you take it at face value, and I know that when they do their various media interviews and so forth and comment on the markets, they have to talk in sound bites and say things in brief format because television, for example, is largely the idiot’s medium. You just don’t have much time. So, that’s one of the things to just remember when you’re listening. And as soon as I asked Harry Dent about the local markets, he parsed them up and segmented them.

Anyway, I think you’ll find this interview interesting. Again, not much time to talk to you today but I will talk to you more on the next show. Listen in and enjoy the interview.

Start of Interview with Harry Dent

Jason Hartman: Well, it is my honor and pleasure to welcome Harry Dent to the show. Harry, it’s good to have you on.

Harry Dent: Nice to be here, Jason.

Jason Hartman: Good. Well, tell us a little bit about what you do. You’ve written several books, many of them hot selling books. And give us a little background on your company.

Harry Dent: I really got into forecasting in the late 80s after working in business consulting, first at Bane and company, the large companies, and then with New Ventures and small companies in California. And I just started realizing that the baby boomers, new generation, was driving all these trends and just kept doing more research and the new technologies emerging in this generation, and kind of came up with a whole new way of approaching economics. We look at demographic cycles, in other words the predictable things people do as they age. And of course people kind of come in large generational surges like the baby boom generation. And so as the baby boom’s been aging and getting married and having families and buying houses, we’ve seen a boom.

And we started realizing in the late 80s when we first got some of our key indicators that a lot of people were calling for a depression in the 1990s on a famous [00:05:00] for kind of 55-60 year cycle and we were saying no. No, the 90s is gonna see the greatest boom in history because the baby boomers are gonna be in their strongest period of productivity and spending and then that boom was going to continue into this decade and we would see a depression, an extended downturn from late in this decade into the next decade and beyond. We also predicted the Japanese slowdown in the early 80s.

So, again, we took indicators that the economists do not even look at and say oh my gosh, the long term is very predictable, economists have it backwards. It’s the short term that’s difficult. This recent crash in stocks, even though we were expecting it sooner or later, kind of came out of nowhere and then all this hidden off balance sheet stuff and all and kind of like Enron. But the short term stuff you can get huge curveballs. But long term trends are very predictable. Every 40 years we’ve seen generations peaking their spending and you get long term tops in stocks. Like 1929, 1968, and now between 2007 and 2009. And commodities are similar, too. It’s a different clock and it’s more of a technology cycle, but commodities have peaked every 29 to 30 years. In 1920, 1951, 1980, and now we think we’re due for some sort of peak higher. We don’t think the commodity boom’s over yet, probably around late 2009, early 2010, so we start with fundamentals.

Technology cycles and which go through very clear stages and affect our economy and we look at demographic cycles of spending, investment, borrowing, all that sort of stuff, and down to micro areas like potato chips if need be. And then we look at cycles that repeat like this commodity cycle and then like a 4 year cycle in stocks and the decennial cycle and things like that. And then finding the short term in our newsletter, we looked at, just like any technical analyst would be, how bullish or bearish are people and that sort of thing, whether the markets are likely to be going up or down short term because the short term really doesn’t have as much to do with fundamentals, so we say in the long term the fundamentals are everything. And they’re actually pretty darn easy to measure and project. And in the short term, the technical indicators, how bullish and bearish and how crazy people are makes more of a difference. I mean, we’ve got panic hedge fund selling unwinding all their leverage and bad moves. And that’s just causing a short term meltdown that doesn’t have that much to do with the economy.

Jason Hartman: I agree with you. I kind of differentiate that by saying there’s the virtual economy or the Wall Street or the financial economy and then there’s the real economy, you and I trading. And there’s a difference. There seemed to be distinct elements. And as you see these hedge funds unwind and deleverage, you’re seeing a lot of artificial downward pressure on various commodities out there and various assets. One of the things I love about your work since I discovered it in the 90s, it seems to be pretty simple, at least the way you put it has simplified itself so much for me.

You name the peak earning years. I think you say about age 46 or the peak spending years. Do you want to go into that for us? And it seems so easy to follow demographics.

Harry Dent: True. The demographics is simple. We have a lot of indicators and putting them together can be complex to some degree, but yeah, the indicators themselves are very simple. Yes, people enter the work force at age 20 ½ today on average, part from high school, part from college, and they grow up and they earn and spend more money until a plateau between 46 and 50. So all we do is take the birth index, adjust it for immigration, past and future forecast, move that forward 48 years for the average peak in spending and boom, the economy grows without you. You’ve got a 50 year leading indicator. The economy grows with that, the stock market adjusted for inflation generally follows that, I mean it’s an incredible indicator.

And it allows our indicators, because they’re simple, number one, and 2, because you can project them well into the future, they allow people to plan for the rest of their lifetime, not just until the next election.

Jason Hartman: I agree with you, yeah.

Harry Dent: It’s a whole different approach. And again, economists hate people like us cuz they say that’s not possible and we’re all too complex and it’s changing too fast. But you know the more complex the world gets, the smarter we get and the better our information. And all we’ve done throughout all of human history is understand more processes and make things predictable like the seasons and farming and all this stuff. And now we’re saying, gosh, you can literally see the major trends in inflation and deflation, spending, investing, different countries around the world, different regions in the country decades in advance.

Jason Hartman: Well, I agree with you. And that’s one of the things that’s interesting about your work. It seems reasonably predictable to look at macro trends in The United States. But the thing I don’t know, I know that in The US we of course got the baby boomers at 76 million person cohort. We’ve got the gen-Y or millenialists, that’s about 80 million or even a bigger cohort I believe by a little bit. And so they’re entering the work force now. The baby boomers are starting to think about cashing out and get out of the work force or at least downgrade their spending, start cashing out their retirement plans and so forth.

But what are the different cohorts around the world? Because the economies are so coupled and interconnected nowadays. I never heard you address that thought and I was wondering what you thought about it?

Harry Dent: We are gonna address that much more in our book that’s coming out late December/January. We have an entire chapter that looks at the spending wave, we call it the same concept: moving forward the birth index or the age distribution for when people will spend the most money, and it’s very different around the world. We’re about to see a very major divide or tipping point here where the western nations like Europe and North America and Australia and New Zealand and Japan to a lesser degree that have really driven the world economy so much for decades and centuries are literally starting to age and slow down. But the millennial generation here is the first generation actually that their birth levels only came back up close to the birth levels of the baby boom. In other words, it’s not a bigger generation. It doesn’t take us to new highs. Our country is gonna more like plateau for many decades. Europe doesn’t even have an echo boom generation, which means after 2010 they decline as far as the eye can see.

Jason Hartman: And they have a big legacy problem because they haven’t replaced the younger workers.

Harry Dent: Exactly. They don’t have young people. And without young people, you die. We say Europe, if you look demographically, is kind of like a person going into retirement. Europe is retiring. They’re going slow and contract. The United States was more like at its peak like in its 40s and 50s, still at the crest, still healthy and strong and wealthy, but not gonna grow like it did in the past. And you’ve got these new Asian economies, they’re the new 20-somethings and 30-somethings. I mean, China, surprisingly has strong growth into about 2015 to 2020, but then. . .
Jason Hartman: They’ve got a demographic problem, too.

Harry Dent: They have a demographic problem because they stopped having kids by law in the early 70s. So, in our theory, that hits you about 50 years later, 40-50-60 years later. India, if I had to place my bets on one country going in the future, an investment for my kids, it’d be India. India has demographics, as long as they don’t screw it up, to grow into the 2060s for 5 or 6 decades ahead. Many countries in Southeast Asia grow to 2040s-50s-60s, some middle eastern countries farther out than that. Most of Latin America grows for many decades. So, we really are gonna switch from the developed world to the emerging world after this boom.

People have been saying oh it’s gonna be Asia’s decade or Asia’s century, but hey we’ve been growing rapidly, too, with this big internet boom and this giant baby boom generation, but the west really does slow down. And The United States is in a much better position, primarily for the things most people criticize on immigration. Our immigration has kept us younger. And the immigrants are having more kids. It’s not a bigger generation, but we have at least a generation to kind of like replace us and at least let us plateau for the coming decades and then have another boom. It’s really grim if you look at Russia, East Europe and Europe going forward and not too far down the road, China and Japan are the real aging nations.

Jason Hartman: Yeah, I mean Russia is really a dying nation even though they’re prosperous now. But they really have a huge demographic bubble in Russia. On the Europe question, is there a distinction between eastern and western Europe as far as the demographic bubble? Because I know the western Europe is really a retiring region. But what about Eastern? Is that different at all?

Harry Dent: Eastern Europe booms a little longer, some of them out until 2015 or 2020 but then decline sharply. Southern Europe, Spain booms and has growing demographics in 2020 and Italy into 2015 and Greece. But then they really drop off. Southern Europe actually is the worst. Well, Russia’s the worst and then Southern Europe and then probably East Europe and then West Europe. And then Northern Europe is the best. The biggest surprise is the people in Scandinavia, Norway, Denmark, Sweden and all that, they have very high women workforce participation and very strong support for them. So their women still have a reasonable amount of children, not even to replace themselves, I mean they’re going to slowly slow down but not as much as the rest of Europe. So they’re kind of the best position. Great Britain, Denmark and Scandinavia are the pest positioned in Europe.

Jason Hartman: Very interesting. Well, tell us more about the Dent method and what do you look at? Tell us of these peak spending and peak earning years. I think those are great little simple barometers there.

Harry Dent: Yeah, the peak spending comes between 46 and 50, kind of like a double peak. And many people spend less the rest of their wife. And then of course there’s a reason but this whole cycle tends to revolve around kids. They enter the workforce around age 20, some people 18, some 22, they get married at age 26, some people earlier, some people later depending on whether you went to college or not. Then we have kids in our late 20s, early 30s. And then by the time we hit 36 to 50, our kids are either getting out of high school and going to the workforce or they’re getting out of college and going to the workforce. So they leave the nest between 46 and 50. And once they leave the nest, not only do you not need a bigger house, in fact you bought your house many years before when they were in high school, but you don’t buy cars often because you’re not driving them around to soccer practice. You don’t need as much food in the refrigerator, you don’t have as much car insurance, on and on and on. So people naturally saved more for retirement and spend less. So saving is a good thing of the individual but for the economy you get a whole generation like Japan in the 90s just all of a sudden shift from spending more to saving more and spending less. Well, you get an endless recession. And that’s what Japan had.

I mean, we did predict that downturn in the late 80s, not only because they had an unbelievable real estate bubble and stock bubble similar to The United States today but they were coming on a demographic slowdown 2 decades before The United States and Europe. So, one of the great things when people say, well what’s this gonna look like, this slowdown we’re predicting, I said “Woah, first of all you can look at Japan – they’ve already been through it.” And real estate went down 60 to 70 percent in Tokyo over many years. The stock market went down 80% even though the rest of the world was booming.

And their government tried to stimulate the economy, they had extremely low interest rates, and you ended up being more on the deflationary side anyway because the government was pushing on a string. Old people don’t need to acquire durable goods and they don’t need to borrow money. They pay down debt. They save and they don’t spend. They particularly don’t buy durable goods like cars and houses and things like that.
So, these demographic cycles are very clear. Those people do stuff at predictable ages. We can tell you when they have the highest mortgage, age 41 to 42, when they invest the most money in stocks and overall, like age 54, when they have the highest net worth, age 64. Anything you want to know, when they buy potato chips, 42, when their kids are at the peak of their calorie intake at age 14, it’s a science.

Jason Hartman: That’s amazing.

Harry Dent: It’s nothing like economics where people are guessing what the government’s gonna do and whether the dollar’s gonna go up and down and all this crazy stuff. It’s a science. This is as predictable as life insurance actuaries predicting when you’re going to die.

Jason Hartman: Very interesting stuff. What is the peak earning year? What age is that? Is that 46 as well?

Harry Dent: Yeah, similar, in the late 40s. Earnings actually may peak a little bit later or a little bit higher, say more like 50 than 46 to 50 as people started to save a little bit. But, yeah, it’s a similar time and then earnings go down as well. People don’t just save and spend less but earnings go down. One of the first things that happen for a certain percentage of households as women who’ve been working to get the kids through school and college and support the household, say okay, I’ve had enough. And women start to leave the workforce quicker than men after age 50. So that’s one of the reasons that earnings go down and another reason people probably work less over time and work less hard and advance less fast. But regardless of the reasons, the statistics are clear. People aren’t going to spend more money until age 46 to 50, and they earn and spend less the rest of their life.

Jason Hartman: Very good. What about the issue of inflation? If you’ve got a large segment of the population in their mid-40s, is that going to creates more inflation because there are more people consuming, more people earning. There’s just more wealth in the system. And when were we at that mid-40s, the biggest segment of the population in the mid-40s, was that in the mid-90s?

Harry Dent: No, we’re at that now. When the peak comes, that’s the boom. It’s actually counterintuitive but it’s the opposite. Young people are inflationary. Think about this for a minute. I mean, it doesn’t get simpler than this. Young people cost everything and produce nothing.

Jason Hartman: Right, I read that in one of your papers.

Harry Dent: Okay. They are inflationary. Parents have to invest a quarter million dollars to raise the average kid, not counting college. The government has to make major expenditures on the education system and these services. And businesses have to build offices for them and equip them with new technology and train them for the first couple of years they come in before they become productive. So when people are reaching their mid to late 40s, they’re not only just earning and spending the most, they’re the most productive they will be as workers, and high productivity is disinflationary, it brings inflation down. So the reason e have the highest inflation rates in US history, and remember oil prices were $40 in 1980 and they were $147 earlier this year. And we had inflation of maybe 4-5-6 percent this year and back then it was 14-15-16 percent and mortgage rates were off the roofs. It’s because this massive baby boom generation was entering the workforce.

So we have an indicator like our spending wave that’s called the inflation indicator. And it’s a 2 ½ year lag on workforce growth. When more young people are entering the workforce, that tends to be inflationary. Well, we had the highest amount of that in the late 70s with the highest inflation rate. And what’s gonna happen here ahead, and this is also kind of counterintuitive, but baby boomers are gonna sensor a larger generation relatively. They’re gonna start to retire in the next decade faster than the echo boom enters the workforce. And that, when your workforce contracts or slows, that is deflationary.

So this indicator, which the spending wave we came up with in 1988, 1989 the inflation indicator. This thing tracks inflation better than I would have expected. I mean, you run a short term basis. It catches most of the wiggles. And it says we’re gonna have inflation pressures and a 2009-early 2010 from the kind of growing workforce in the late 2007 before the slowdown started and then we’re going to switch to deflationary trends from 2010 onwards. Again, we can go 2 ½ years on this indicator, but we can also go past that and predict, well, we know that people enter on average at age 20 to 21 and we know they exit on average at age 63 so we can project those trends in the future and it actually projects deflation. Now, that difference is disinflation means a lower rate of inflation.

So since the peak of inflation, I’m thinking about 16% of 1980, we went down to very low inflation, say about 1 to 2 percent in the late 90s and now we’ve come back up to 3-4-5-6 percent here recently because echo boomers have been entering the workforce a little faster. Then we will eventually go down and see prices fall. Deflation is when prices actually fall. And the only time we’ve seen that was in the 1930s, the only time in any of our lifetimes and certainly not in my lifetime, it was 80 years ago and we’re saying the same thing’s gonna happen again.

It appears that the government’s gonna inflate their way out of this, which they’re gonna try, and we’re gonna get inflation we think first, but eventually when the economy slows down, you have to write up all these real estate loans and real estate goes down 50% instead of 20%. The contraction of loans in the banking system will destroy way more money, because it’s so leveraged, 10 to 1, than any stimulus the government can put in and you end up with deflation in the end. So that’s a mind blower and it’s a contrary forecast. We think we’re gonna have inflation in late 2009, early 2010 if we get any type of recovery from the stimulus plan. And then the government’s not gonna be able to keep stimulating and inflating because inflation becomes a problem.

And then the economy finally goes down because baby boomers are on a real downslide of spending and the governments can’t do anything about it and they’ve blown all their ammunition anyway and we go into a deflationary downturn like the early 30s. So, you can imagine there’s a lot of threats there and a lot of opportunity if you understand something like that’s gonna happen.

Jason Hartman: Right. So I agree with you in part, but here’s the big part that I’m not sure I agree with you on. We’ve got this global economy and we’ve got 2 ½ billion people that are playing in the game that they weren’t playing 20 years ago. So what do you say about the consumption from China, India, Latin America? I mean, there’s a lot of consumption. And that is inflationary I would say, but there’s production with it. So when you look at it through the Dent glasses I’m not sure what you think about that.

But the fed here has really realized that they just don’t have control over the global economy. If it were 20-30 years ago, the fed would do something and the US would react and it would change things dramatically. And they’ve used almost all their ammo. Their last bullet in the gun is a 1% or 100 basis point decline in the fed rate. And so they’re almost out of bullets. They can’t do it because they don’t control the rest of the world. Now they’re doing things like coordinating rate cuts and opening more discount windows and credit facilities but it just doesn’t seem to be doing the trick. So what do you think about the global consumption issue that wasn’t here. . .

Harry Dent: First of all, global consumption’s great for them but what people don’t realize, and this is just a fact, we export only 3% of our GDP to all of Asia. So Asia could be growing at 20% a year. But if we’re imploding and we’re slowing, our economy’s still gonna slow and Japan went through the same thing. Japan had an endless recession and mild deflation even with the rest of the world booming on an unprecedented scale across the board in 1990. Everybody was booming in the 1990s except for Japan. So that’s one example where a country went through deflation anyway.

And our economies are coupled but they’re not that coupled. I mean, we don’t sell that much to Asia. And the second thing is they are these emerging countries in their early stages and it was true of our country, too, 100 years ago, are more dependent on commodity prices. It’s more part of their equation. India spent 60% of its budget on commodities and foods and China 40%. We only spend about 10% of our economy. So these commodity cycles are very important for their inflation rates and we show the commodities are due to peak around 2009 or 2010 and decline for a decade or so before they come back. So there’s a lot of factors. . .

Jason Hartman: And when you say commodities, can you parse that up for us? Are there any specific commodities to which you’re referring or you’re making a broad stroke there?

Harry Dent: They do tend to peak together. And the last major peaks like in 1920, major commodity peak 1980, 1951, these different commodities, agricultural commodities, industrial metals, precious metals, energy, oil, all peaked within about a year of each other. So they do tend to run in similar cycles. And right now we would be the most bullish looking head that we think a huge buying opportunity’s coming here in oil and energy. If oil hits close to $50, we think oil could go back to its highs or even make a new high, $180 in the next year and a half, and that would outstrip anything any stock market could do and gold will probably at least double. Gold is a hedge against both inflation and monetary meltdown. And oil is a great hedge against terrorism and that sort of risk.

I think any rebound in the economy will be good for the whole commodity spectrum, but I think it would be particularly strong in energy in precious metals.

Jason Hartman: Okay, so back to the precious metals thing on the gold issue. I’m a bit of a gold bug and I generally agree with gold bugs as far as their premise, I just don’t agree with their conclusion and the reason I don’t is because it all makes so much sense. Gold should be $2000 an ounce right now in my opinion. But the problem is it’s manipulated by all the central banks that keep selling it off to suppress the price. They trade it amongst each other and those transactions are recorded and they suppress the price artificially because they want to pump up their fiat currencies. I can’t see any other thing than that. There’s just a lot of manipulation in the gold market. And all precious metals for that matter, I mean silver is certainly, too. Don’t know if you study that or what your thoughts are on it.

Harry Dent: I don’t get in that level, but again we do look at cycles, and gold did peak in 1980 at near $800 an ounce and it was projected to go to $5000, and next thing you know, years down the road it’s at 200-something. And oil peaked at 40 and projected to go to 100 and next thing you know, in 1986, it’s $11.

So these commodity cycles are the most volatile. And yes, they can be manipulated and everything else, but if I had to put my money in one place here in near term, I think stocks are probably gonna fall one more time, maybe down to stronger support around 7000-7200 in the next few weeks or few months. But I think ultimately they’ll bounce in the next year with this recovery, maybe 20-30-40 percent, but I would way rather have my money in places like gold and energy and oil right now because the bounces there could be doubles or triples.

Jason Hartman: Versus stocks that won’t have that much of a bounce.

Harry Dent: Yeah, versus stocks going up 20-30-40 percent, this would be what we call a B-wave rally, it’s a bear market rally. All this stimulus may get lending back to some degree, it may help housing, but like you say, we see what we see. Our indicators say if we get any type of substantial turnaround in the US and global economy, inflation’s gonna come back faster than hell. And inflation’s the biggest problem over in emerging countries right now. I mean China and all these countries are running higher inflation rates than we are. And, again, they’re much more sensitive to commodity prices. So inflation’s gonna wreck this party if the government is even capable of offsetting this credit de-leveraging meltdown.

But we’re saying, hey, in the end they won’t be able to because baby boomers are just gonna get weaker on them and that’s gonna cause more deflationary downward tendencies. So the government’s stimulus plan is not gonna work. At best, it ends up in an inflation crisis which keeps them from stimulating further and then it switches to deflation. And at worst, it’s not enough. Whatever they do and whatever China does is not enough because this credit deleveraging, this credit default swap thing is so huge and so toxic that it is literally possible for credit to contract faster than the governments can stimulate.t

Jason Hartman: And that is certainly what is happening now.

Harry Dent: That’s what has happened thus far. But this credit’s also massive. I mean, that’s the biggest argument we have internally in our company right now and with other people. Do we get much of a rebound and bounce which spokes inflation or do we just keep melting down? I mean, we’ve got people even in our company to think and some other economists think I just don’t think they can stop this credit meltdown. I think they can because I’m looking at the LIBOR rates going down. I’m looking and the markets have clearly switched from worrying about a banking meltdown to worrying about, oh my gosh, how deep is this recession going to be? They’ve clearly switched and that’s why the LIBOR rates are coming down, gold has come down, but I’ll tell you, gold gets down much farther and oil gets to $50, we’re gonna give a very strong bi-signal because even if we just get a half-hearted bounce, even if oil just went back to $100 a barrel, which would be very easy. . .

Jason Hartman: Which I agree with, by the way. I think oil’s gonna be $100, I think the DOW is gonna be at about 6000, it’s going to be its bottom. And that’s where we’re going to be. So I don’t know.

Harry Dent: Most bubbles, and it’s true of housing as well, go back to where they started or a little lower. And the bubble really started and stopped in late ’94 when the DOW was about 3800. And house prices we’re saying will have to go back to 1996 to 2000 levels kind of where the bubble started there, somewhere in between there. So we think the DOW is gonna probably end up a little lower than that but I wouldn’t be surprised to see it hit 7000 just near term before we get some type of more concerted bounce. We haven’t had a bounce yet that’s lasted more than several weeks.

Jason Hartman: Yeah, the election didn’t seem to help.

Harry Dent: I think we may get a 3 to 6 month bounce, but I still don’t think it’s gonna be that big. I think this market is mortally wounded.

Jason Hartman: Yeah, it’s a bear market. Talk to us first of all on housing. I want to ask you to parse that up a little bit if you would because people talk about the housing market as though it’s some nationwide phenomenon. And in a country as large and diverse as the USA, I mean there’s a market in Texas and there’s a market in California – they’re dramatically different.

Harry Dent: Very different.

Jason Hartman: You want to parse that up for us a little bit?

Harry Dent: Yeah. I mean it’s both true. The markets regionally are extremely different in evaluations and supply, demand and space limitation, all that stuff. But nationally there’s still an overall baby boom bubble. And the baby boomers were on their peak home buying years, early part of this decade and then the fed lowered interest rates to 1% and the banks started offering no money down low teaser rate loans and people just went nuts.

And we were predicting in 2003-2004 that the housing bubble would peak well ahead of the overall economy as it did in the roaring 20s. Housing prices peaked in 1925, the economy didn’t collapse until 1930 and housing as well. And that’s because demographically housing peaks earlier in the cycle and also bubbles can only go so far until they blow themselves with their own extremes.

Actually, on our website we have some information about our new book. We got a Q & A that’s very useful. It’s free to download. We got a video just above that and we also have a 2 page press release. And in there it’s got 3 key graphs. It’s got this spending wave, this 40 year cycle, it’s got this commodity cycle, and it’s got a housing chart from Robert Shiller at Yale.

He went back and adjusted housing for inflation, size, and quality. And, you know what, housing is basically flat long term, adjusted for inflation. It basically goes up with inflation or replacement costs. And housing in 2005 and 2006 got to basically twice its long term value, double what it should be. So that means housing has to drop we’re saying 40 to 60 percent.

Jason Hartman: And it has done that in some work.

Harry Dent: And that might be 30% in Dallas and it might be 80% in Miami.

Jason Hartman: The problem is, though, when you look at a market like. . .I agree Miami and California and all the bubble markets have another 15% decline ahead of them in my opinion.

Harry Dent: We think they got more than that.

Jason Hartman: I’m usually not accused of being too optimistic, by the way, but maybe I am. But you look at a market like Dallas where you can buy it, virtually the cost of construction. There’s no land in the equation. And it seems like you really don’t have that much downside risk there. But who knows what. . .

Harry Dent: I agree. And that’s why we tell people if you’re looking at housing, you’re right, it is so different across the country. This whole thing bubbled up together and while housing was going up 3 or 4 percent in Dallas, it was going up 15% here in Miami. So there’s going to be a huge difference.

Look at what your house was worth in 2000, worth in 1996. In that timeframe, that’s a good indicator for where housing will have to go back. And, again, that may be a 20% correction overall on Dallas and in 70 or 80 in Miami or New York City or San Francisco. So, there’s huge differences, and you’re right, places like North Carolina and Texas and Utah, there’s a lot of places that aren’t overvalued or just barely overvalued and they’ll only probably come down because generally demand goes down and commodity prices come down and some construction cost, but basically there’s a huge difference in exposure and I’d much rather have a house in Dallas or Raleigh, North Carolina than Miami or San Francisco right now.

Jason Hartman: Yeah, couldn’t agree with you more.

Harry Dent: And especially New York. New York’s gonna get crucified.

Jason Hartman: Oh yeah, all the financial stuff, laying off people on Wall Street like crazy. Tell us about your thoughts. We talked about inflation a few minutes ago and I wanted to jump in there and ask you what do you think about the consumer price index and the government’s official numbers of inflation? Do you think they’re accurate, do you think they’re crazy? I think they underestimate true inflation and you could certainly say that 8-10 months ago. Nowadays, prices have softened up on a lot of things and they’re not so sure. When I used to say that 8-10 months ago, everybody thought you’re so right, there’s no way inflation is only 3 or 4 percent, it’s easily 10-12 percent. But now people are kind of looking, well, maybe the government’s not off by that much. What does Harry Dent think?

Harry Dent: Well, I think their indicators show the direction. I don’t think they’re that accurate on both sides. I think in some cases, they underestimate the quality. They measure a car as a car and a car is not a car. A car is a way smoother driving, way better stereos, way more safe, way more everything that they were.

And just like Robert Shiller showed, we have this perception that housing goes up so fast over time but when you adjust it for the average size and quality of the features, it hasn’t gone up as much as people think. It’s gone up with inflation, maybe an average of 3% long term. On the other hand, there’s a lot of things that are underestimated. And I know, for one thing, for affluent people inflation’s way higher. There’s too many damn rich people in this bubble and you gotta stand in line for a Maserati, wait two years and pay a premium and all this stuff.

Jason Hartman: Not so much anymore, though

Harry Dent: Good wines and high end homes and vacation homes have gone up way faster than other things. So it also depends on who you’re looking at. There’s no question that inflation rates on the fluent are higher. But as long as bonds follow the CPI on a certain kind of basis and the direction’s right, then we can still predict the direction of inflation and I don’t think their numbers are totally accurate for sure but I think it goes both ways.

Jason Hartman: It depends who. And I know that Forbes, I believe, was publishing. And I haven’t been able to find it, I have looked for it a couple of times, a cost of living well index, the inflation for the rich. And I wish I could find that.

Harry Dent: Yeah, I’ve got that somewhere. I’ve pulled that before and it is much higher and anybody who’s affluent knows that there’s no question about it. I’ll tell you another thing, though, that our research shows from way back in going over history, the times of the greatest demographic expansion, growth and population, growth and prosperity, have been inflationary. In other words, inflation is a leading indicator of prosperity. It’s an investment in the future. Inflation comes when you have to incorporate a new generation in the workforce, when you have to make major new infrastructure investments and then those investments pay off over time and the generation of course pays off as they earn and spend more money and grow up.

And so inflation, basically the math of inflation in the 70s, you just add 30 years to it and you get this boom because people cause inflation when they enter the workforce around age 20. And they have high key productivity around age 46 to 50. So it’s like a 30 year leading indicator and back historically it was more like 20. But it’s very clear if you look at history. The times of the greatest expansion, whether it be the Greek and Roman empires or the 1100s-1200s when cities were growing across Europe or the 1500s and 1600s when there was massive expansion, inflation was rising.

So inflation is not the monster people say it is. It actually reflects higher specialization of labor. The more things you contract out to other people and they specialize on, the more services you get, the more you have to pay. But if you specialize yourself, you make a lot more money so you can afford to have all those services and do what you want and do what you do best.

There’s a lot of different levels with inflation. There is short term monetary inflation and commodity inflation and you can create inflation obviously from irresponsible government. But really long term inflation like the inflation that we’ve seen in this century basically says, you know what, you’re in growing times. Demographics are growing, technologies are growing, infrastructures are growing and you’re making investments to keep up with that and they pay off every time.

Jason Hartman: That is a very interesting outlook. I completely agree when you talk about the specialization of labor. The division of labor issue in a high tech society is by nature inflationary because you have to pay a profit margin to ever provider. That’s a very interesting point.

Harry Dent: And it’s a luxury to be able to do that. I mean, imagine going back to Little House on the Prairie and the wife’s gotta beat the clothes on the rocks all day and you gotta sit out there and push the plow and fix the house. . .

Jason Hartman: You do it all yourself, there’s no middle man.

Harry Dent: There’s nobody to help you, you gotta do everything yourself? Nobody’s good at everything. It’s very inefficient.

Jason Hartman: When we talk about inflation, if you would address the entitlement issue. As I see it, the government has a $56 trillion entitlement bill coming at it. As I see it, there’s only a few ways the government can work its way out of that mess. Number 1, break the promises which they’re not gonna do because that would be political suicide for both parties. And number 2, it would be increased production, especially in the form of exports. But spending, that’s not gonna happen. Increase taxes, there’s simply not enough revenue to be gained. The solution I see for the government is just create more fake money, more fiat money.

Harry Dent: Yeah, but even that doesn’t do it. You can’t create something for nothing, that’s never worked long term. You create fake money, it ends up deflating back out of the system and causing a disaster.

Jason Hartman: The problem with our society is that our whole focus is on the short term. Every CEO. . .

Harry Dent: That’s human nature. That’s always been the case. Here’s the solution, I’ll tell you the solution. And it’s not your solution, it’s not my solution, it’s not the government’s solution, it’s the economy’s solution. Kill the damn system. Pull the rug out. After bubble boom, pull the rug out, have deflation, have banks failing, have companies failing, reconsolidate, go to a big chapter 11 and then you rearrange all your debts and obligations. You’re right, government cannot deal with this because it’s politically unacceptable. They can’t meet these obligations over time.

We’re talking a not rosy situation for the next 12 to 14 years. Even if we had the economy continue to grow 3 to 4 percent, we couldn’t fulfill all these obligations with the aging of our society and fewer young people. It’s ridiculous. But nobody will face it. Consumers won’t admit it, government won’t.

You got this one guy, I forget his name, running around. Peterson and his foundation and this other guy pass control or something, say this is a huge problem, it’s much bigger – they’re right. What I’m saying is it’ll never be dealt with unless it’s forced to. In a crisis we will end up restructuring this. And the truth is affluent people will get nothing from entitlements. And every day people will get more ration entitlements but they’ll be the ones that’ll get them. And they’re just gonna have to restructure the whole system.

It’s gonna happen between 2013 and 2016, that’s our prediction. But they’re going to be dealing with a banking crisis in the collapse of real estate in the 2012, in the second term of Obama or whoever’s elected, and it will be a democrat if it’s not him, they’ll be dealing with this restructuring of entitlements.

Jason Hartman: So, will the entitlements be there?

Harry Dent: They’ll be restructured. They’ll be greatly rationed to the people who really need them. What’s going to happen across this economy, it happened in The Great Depression too, taxes went up, of course mainly on the rich and businesses, and entitlements were created like unemployment and social security for the everyday person more. The affluent are gonna lose their benefits. If you don’t meet it, you’re not gonna get it. And people are gonna have to retire a little later and that makes sense because we’ve been aging dramatically in the last decades. I mean, we shouldn’t have retirements set at age 62 or 65. It should be at 70 and ultimately at 75 or something.

Jason Hartman: Yeah, I agree. I think a lot of people want to work.

Harry Dent: There’s another thing that’s important to understand. In the 30s when we went through the last kind of depression crisis we were a net creditor to the world. We were more like China, the up and coming emerging country versus Europe. Today, we’re a net debtor. We don’t have the ability to say well we’re gonna inflate or do whatever we want or restructure benefits. Because China and major countries in the Middle East are holding our dollars and our bonds and they don’t want us to go down. They don’t want those things to depreciate more than they have to. But if we’re responsible, they’ve got the ability to say well I’m sorry. We’re not buying any more of your bonds, we don’t trust you, and we’re dumping the ones we got. And that means you are really in trouble. How can you inflate if there’s nobody to buy your fake money?

Jason Hartman: Right, I agree. But their question is they’re going to kill their own customer. They can’t seem to create enough internal demand in their own countries. And they will create more as time goes on.

Harry Dent: Right, they don’t want us to die. That’s what I’m saying. They will work with us, just like a creditor, chapter 11. But we can’t just do whatever we want. We’re gonna have to do things that are a little more responsible and I think the best thing to do is invest in infrastructures here and around the world and then that’s something that at least whoever’s lending you money like China or bailing us out, I think China’s gonna have to bail us out in the end, in the Middle East. And now they’ve got something they can claim revenues for 30 years if we’re building water systems or roads or alternative energy systems and things.

So, I don’t know exactly how it’s going to work out. All I know is to compare it to a chapter 11 reorganization. I think our entire economy is going to be basically bankrupt. And it’s not dead like a chapter 7 where you just say okay it’s dead, fell off the assets at fire sale prices and give the money, whatever little bit’s left, to creditors. You just reorganize the debts and agreements and we’re gonna have to reorganize our debts with China and our internal debts and our entitlement systems and we’re just gonna have to go through chapter 11 and sort it out. And it’s gonna be a mess but we’ll come out with a much lower cost of living and business structure and lower cost real estate in the end which will be a huge boom to the young people just coming up.

Jason Hartman: Yeah.

Harry Dent: We’re gonna be huge winners if the baby boomers with all of these inflated assets that are gonna lose, these young people are going to be able to buy a house for $100,000 instead of $200,000 and be able to get a 4% mortgage instead of a 7% mortgage.

Jason Hartman: So your prediction on rates, you think rates will be kept low? Or what do you think about mortgage rates?

Harry Dent: I think they’re getting about as low as they’re gonna get here. They may go a little lower with the weakening economy. And any sign of recovery, rates are gonna hike right back up. I mean, you got a 30 year treasury right now close to 4% when inflation recently, CPI, has been 5 to 6 percent. Now, obviously that’s only because they expected an extreme slowing in economy. The economy looks like it’s gonna rebound and we’re gonna be back at inflation rates of 5 to 6 percent. Well, that treasury bond ought to be at 8 to 9 and that means mortgage rates ought to be 9 to 10 and 11.

So you’re going to see interest rates go up if we get a recovery and up more than people would expect. And then eventually, when we get into the depression stage, which we don’t see until at least mid-2010 through 2012, something like that, then rates come down but they come down in a lag because in the depression, most people don’t realize that bond yield spiked in 1931 because the crisis looked so ominous. People are thinking, well gosh, maybe even the government’s not gonna be able to able to pay off its bonds. Well, that’s certainly gonna happen this time around when we’re sitting there begging China to bail us out.

Because, like you say, we’ve already blown our ammunition on this first phase. We get in this second phase, we have none left. And then you got baby boomers slowing and spending. But ultimately, interest rates go down but the 30 year treasury got down to 2% in the late 30s and early 40s during the depression.

Jason Hartman: Yeah, amazing, amazing. Your new book coming out is called The Great Depression Ahead. There are still many that are denying that we’re in a recession now which I can’t believe. Can you give us a definition for depression? I mean, I know there isn’t really an academic one out there, but what is Harry Dent’s definition of it?

Harry Dent: Well, again, for us it’s a natural part of the business cycle, 4 seasons, inflation and innovation, a growth boom when new technologies first emerge and create the highest productivity and growth, but then that also creates bubbles and asset inflation is not sustainable and then the depression is a shakeout kind of chapter 11 as we describe it, economy that takes all that leverage out of the economy and gets prices back down and forces companies and banks to consolidate for greater scale and efficiency and actually ends up creating what we call a maturity boom to follow like the 40s, 50s and 60s where you see more mass prosperity rather than the rich getting richer and this recent boom.

So, it’s a part of the business cycle. It’s a shakeout of the system after a bubble boom and it is accompanied by deflation in prices. That is the key thing, the 70s downturn was inflationary. We had a larger generation entering the workforce, big commodity bubble and all this sort of stuff, this time, because we have to wash out this leverage and credit and these bubbles, it forces deflation for a period of time and that’s what distinguishes a depression from a recession. A recession just means, okay, things go down, inflation rates go down, economy slows, you get some unemployment, but hey, you don’t have banks failing all over the place and major business consolidation, just minor.

Depression is a major change in the economy. We have an 80 year new economy cycle in our books. And the depression hits right at the middle of the cycle. You’ve got inflation and a growth boom and you switch from rising from an inflationary era to a deflationary era for a time. And it’s halfway through the cycle.

Jason Hartman: Yeah, okay. So let’s talk a little bit about your track record, and I know we’ve got to close up here. Your track record, when I discovered you in the 90s, read the Great Boom Head, I just thought it was fantastic work and I really gotta compliment you. I love the work you do. Tell us about your track record. It seems like you’ve been right on pretty much everything except your predictions on the DOW going to 30,000. Want to address that? Tell us what you think about it.

Harry Dent: Yes, we have been right about the directions of inflation, the economy, this boom, how long it would last, when it would start to fail. We were right about Japan. We were even right about the deficit disappearing for the government between ’98 and 2000. That’s probably the most astounding forecast we made and it’s just because of a good economy. What we’ve been most wrong about is the magnitude first of the 2000-2002 correction. I mean, we said, yes, stocks are overvalued, we’re coming for a correction in late ’99, early 2000, but we didn’t see that big a wipeout in tech stocks at first. It took us a while to catch up on that and see that, oh, that does happen in the tech cycle.

Jason Hartman: You mean PE ratios can’t be infinite?

Harry Dent: No, we knew it was peaking. We just didn’t think they were gonna drop 7%. We thought it was going to be like a 30-40, normal corrections. The DOW’s down 20 and the tech stocks are down 30-40.

Jason Hartman: Talk about washing excesses out of the system. I mean the .com bubble, if there was ever an example of excess and stupid business ideas and dumb business models that just never made any economic sense. . .

Harry Dent: It’s funny, though. That’s not bad. That’s exactly what the economy wants. When new technologies come, large corporations and governments don’t have a clue what’s going to be the killer apps and neither do businesses. So bubbles actually inflate, create a lot of capital short term, and let all these crazy people try all this stuff and then you pull the rug out in the depression and then you see who’s still standing. It really is a very efficient process. I think it was John Vogel was on CNBC the other day and he said capitalism’s kind of like religion. Everybody talks about it but nobody really tries it. Capitalism is brutal, the markets are brutal.

Jason Hartman: The thing that concerns me about what’s happening now is it seems like the government want to just socialize every loss. And of course the rich on Wall Street want to privatize every gain. So it’s like they won’t let capitalism occur.

Harry Dent: They’re going to regret this. The correlation we used in the early 90s, it was a short term crisis, a short term slowdown in housing, there was a boom to follow. So them buying up the toxic debt, the S&Ls, and then selling, hey, it worked out. They didn’t lose a bunch of money doing that. This is a long term downturn and they’re gonna look like incredible fools that they ran up so much debt early on, bailing out businesses and banks when it’s gonna end up going down anyway. So I agree with you. It would be better to just let this happen. Provide some liquidity and stuff but don’t really bail out businesses. If they’re gonna go under, let them go under. Don’t put it on the taxpayers. I think you’re gonna have some really unpopular people. I think Ben Bernanke’s toast. Poor guy, not only because he’s stupid, he’s wrong time.

Jason Hartman: Helicopter Ben inherited his job at the wrong time. I mean, Greenspan left at the perfect time I’d say.

Harry Dent: I tell you, Obama is a lucky person. Because this crash happened so and started to meltdown before he got in, he’s not gonna be fully blamed for this. It’s gonna look like it was already in process and he’s gonna be more like the savior to come in and help the average person. So he’s in a much better position.

Jason Hartman: Yeah, what do you see in an Obama presidency economically?

Harry Dent: Politicians, it’s not that they don’t make a difference, they’re predictable. Economy slows, they will stimulate and the fed will lower interest rates. And when the economy overheats or inflation rises, they will tighten. And they always react too late, too little, or too much in this case. Hey, bonds see inflation coming, they’ll raise interest rates short term and long term. If they see a recession coming, they’ll lower interest rates.

The fed doesn’t have to do this stuff. It’s this thing about we need a mommy and daddy. Oh, we got an owee and we need some cough medicine, a Band-Aid, mommy, we’re really childish on this. It’s not just the government’s fault. We as people don’t want to sit through a common cold and let our body get rid of some stuff. We’d rather take cold medicine and just stop it so we don’t have to get stuffed up.

Jason Hartman: Instant gratification, it’s a very popular thing.

Harry Dent: Yeah, instant gratification. That’s human nature unfortunately. In the end, these processes, these bubbles happen even though people warn against them and these depressions happen even though the governments try to fight them. And Japanese are the perfect example, zero interest rates, every accommodation with the banking system and housing still deflated 60-70 percent and stocks went down 80%. And they still couldn’t get out of a recessionary economy for 14 years. So you can manage it better or not.

I think the best thing, a guy like Obama at least has the capacity to provide some leadership. I mean, we were in a time of change in the 60s and Kennedy was that type of person, FDR in the 30s and Reagan in the 80s. And Reagan was a real leader and we were changing direction then from inflation to disinflation, higher productivity. He was the right guy at that time. I think Obama’s probably more the right guy because basically, we’ve been saying this for many, many years, the everyday person’s gonna turn on Wall Street and on entrepreneurs and business people and say screw you people. You created this bubble, now we’re suffering it. We’re the ones that need to be protected and that’s what’s gonna happen.

Jason Hartman: Yeah, interesting. Well, I didn’t let you finish on the DOW 30,000 prediction.

Harry Dent: And the second thing is we look back at the tech bubble that happened before, the bubble boom in the early 1900s and there were two tech bubbles, one from 1914 to 1919 in a big crash and then a second bigger bottle in the roaring 20s. So we were going back and looking at history and said oh my gosh, we’re going to have another bubble. And in 2006 when oil prices hit $78 we said uh oh, no, this isn’t like the roaring 20s. We didn’t have an oil bubble and rising inflation rates. And we didn’t have 9/11 and a worsening geopolitical environment. So in the summer of 2006 I went back and said, okay, here’s a divergence. Yes, the stock crashed, yes a slow recovery, but by 2006 we should have been zooming in on this next bubble. There’s going to be a bubble.

So we went back and looked at history, I looked very, very hard, and I came up with two important cycles. One was this commodity cycle we’ve been talking about every 29-30 years like a clock commodity cycles peak. And it’s not the same clock as demographic, so it’s just a coincidence that we have this commodity cycle coming and peaking at the same time as the demographic cycle. And of course rising commodity prices are not good for stocks and stock evaluations.

And the other thing we found, somebody had mentioned this once before and I kind of pooh-poohed it and I went back and really looked at it. It’s a cycle. And I don’t know why but we call it the geopolitical cycle. About every 16 to 18 years things will be very favorable for the stock market and then in 16 to 18 years they’ll be unfavorable. Coming after World War II and the wonderful 50s and early 60s and then the Cuban Missile Crisis and Kennedy assassination and Martin Luther King and then the Vietnam War and then the Coal War, things just progressively got worse.

Well, that same cycle says in 2001 we went from a wonderful time for stocks in ’83 to 2000, wonderful for evaluations, low interests rates and inflation, peace in the world, and then all of a sudden 9/11 hits and ever since the world hasn’t been the same. And rising terrorism and geopolitical conflicts in Russia and Iran and stock evaluations literally are half. What we found in the cycle stocks evaluations are half in the bad part of the cycle than they are in the good cycle. So we cut our forecast from DOW 32,000 to DOW 16,000. And we didn’t even quite make that.

Jason Hartman: Yeah, no, you didn’t.

Harry Dent: So our biggest problem has not been the cycles and the direction, better than we even expected to be at that. We have been off in magnitude and so these cycles are part of what we hope to correct of magnitude problems.

Jason Hartman: Okay, good. Well, I’ve taken enough of your time I think. Thank you so much, Harry Dent, for being on our show. It’s, a lot of great resources there. Anything you want to mention in closing?

Harry Dent: Go there, we got a lot of good stuff on the new book? You can also I think pretty soon sign up to get a copy of the book early at a discount. And we got a video that we’ve just given to update people on this kind of crisis, this banking meltdown.

Jason Hartman: Excellent. Thanks for talking to us today and your wise advice. I appreciate it.

Harry Dent: Okay, thank you, Jason.

Narrator: The American Monetary Association is a non-profit venture funded by the Jason Hartman Foundation which is dedicated to educating people about the practical effects of monetary policy and government actions on inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by The Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own and the host is acting on behalf of The Jason Hartman Foundation exclusively.

Transcribed by Ralph Jordan

The American Monetary Association Team


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