CW 75: An Interview with Harry Dent on his New York Times Bestselling Book "The Great Depression Ahead"

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

Nice to be here, Jason.

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.

Well, you know, I really got into forecasting in the late 80s after working in business consulting, first at Bain Co. With large companies and then with new ventures and small companies in California. And I just, you know, started realizing that the baby boom, this new generation was driving all these trends and just kept doing more research and into the new technologies emerging. And this generation and, you know, 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 you know, 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, you know, a lot of people were calling for a depression in the 1990s on a famous, you know, Kondrata for kind of 55, 60 year cycle. And we were saying, no, no, the 90s is going to see the greatest boom in history because the baby boomers are going to be in their strongest path, 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 economists do not even look at and say, oh my gosh, these things, the long term is very predictable. You know, economists have it backwards. It's the Short term, that's difficult. This, this recent crash in stocks kind of, kind of, 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 you know, the short term stuff, you can get huge curveballs. But long term trends are very predictable. Every 40 years we've seen generations peak in their spending and you get long term tops in stocks like 1929, 1968 and now, you know, between 2007, 2009 and. 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 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 the four year cycle in stocks and the decennial cycle and things like that. And then finally in the short term in our newsletter, you know, we look at, you know, just like any technical analyst would be, you know, how bullish or bearish are people and that sort of thing. You know, 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, you know, how bullish and bearish and crazy people are, makes more 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.

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 know, you and I trading. And there's a difference. Those seem 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. I believe one of the things I love about your work since I discovered it in the 90s is how it seems to be pretty simple. At least the way you put it has simplified it so much for me. You know, you name the heat earning years I think you say are about age 46 or this peak spending years. Do you want to go into that for us? And it seems so easy to follow demographics, you know, it's true.

I mean, the demographics is simple. I mean, 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 workforce at age 20 and a half today on average, you know, part from high school, part from college, and they grow up and earn and spend more money until a Plateau between 46 and 50. So all we do is take the birth index adjusted for immigration, past and future, forecast, forecast, you know, move that forward 48 years for the average peak in spending and boom, the economy grows with that. 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 allow our indicators, because they're simple, number one and two, because you can project them well into the future, they allow people to plan for the rest of their lifetime, not just till the next election.

I agree with you.

It's a whole different approach. Again, economists hate people like us because they say that's not possible and the world's 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. I mean, and now we're saying, gosh, you can literally see the major trends in inflation and deflation spending, you know, investing different countries around the world, different regions in the country, you know, decades in advance.

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, you know, I know that in the US we've of course, course got the baby boomers, that 76 million person cohort, we've got the Gen Y or millennialist, that's about 80 million of even a bigger cohort, I believe by a little bit. And so they're entering the workforce now. The baby boomers are starting to think about cashing out and get out of the workforce 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've never heard you address that thought and I was wondering what you think about.

Well, we are going to address that much more. In our book that's coming out late December, January, we have an entire chapter that looks at the spending waves. 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 pivot point here where the western nations like Europe and North America and Australia, 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. 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 going to 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.

And they've got a big legacy problem because they haven't replaced the younger workers. So now.

Exactly. They don't have young people. And without young people, you die. I mean, we say Europe, if you look at demographically, it's kind of like a person going into retirement. Europe is retiring, the whole country low and contract. The United States is more like at its peak, like in its 40s and 50s, still at the crest of its, you know, still healthy and strong and, you know, wealthy, but, but not going to grow like it did in the past. And you've got these new Asian economies that are the new 20 somethings and 30 somethings. I mean, China, China surprisingly has strong growth into about 2015-20.

But then they, they've got a demographic problem too.

Demographic problem because they stopped having kids by, by law right in the early 70s. So see, in our theory that hits you about 50 years late at 46 to 50 years later. India, if I had to, if I had to place my bets on one country going in the future, you know, for 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 2000s and 60s, you know, for, you know, five or six decades ahead, many countries in Southeast Asia grow to 2000 40s, 50s, 60s you know, some Middle Eastern countries farther out than that. Most of Latin America grows for many decades. So we really are going to switch from the developed world to the emerging world after this boom, you know, because people have been saying, oh, it's going to 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 thing that most people criticize, our immigration. Our immigration has kept us younger and the immigrants are having more kids. And so we actually do have a. 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 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, Japan are the real aging nations.

Yeah, I mean, Russia is really a dying nation, even though they're prosperous now. But they, 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?

Eastern Europe booms a little longer. Some amount to 2015 or 20, but then declined sharply. Southern Europe, Spain booms and has growing demographics into 2020 and Italy into 2015 and Greece, but then they really drop off. Southern Europe actually is the worst and, well, Russia is 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 very wealthy countries. They have very high women workforce participation and very strong support for them. So their women still have a reasonable amount of children, not enough 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 positioned. Great Britain, Denmark and Scandinavia are the best positioned in Europe.

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

What are the peak spending comes between 46 and 50. It's kind of like a double peak. And then people spend less the rest of their life. And of course there's a reason for this whole cycle tends to revolve around kids. We enter the workforce around age 20. You know, some people 18, some 22, we 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 46 to 50, our kids are either getting out of high school or going to workforce, or they're getting out of college, going to work force. So they leave the nest between 46 and 50. And once they leave the nest, not only do you not need a bigger house, and in fact you bought your house many years before when they were in high school. But you don't need, you don't buy a car as 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 save more for retirement and spend. Now, saving is a good thing for 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 because they were coming on a demographic slowdown two decades before the United States and Europe. So one of the great things, when people say, well, what's this going to look like, this slowdown? We're prediction. I said, well, first of all, you can look at Japan, they've already been through it. And you know what? Real estate went down 60 to 70% in Tokyo over many years. The stock market went down 80%, even though the rest of the world was booming. So, and their government tried to stimulate the economy. They had extremely low interest rates. You know what, 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 that, you know, these demographic cycles are very clear that people do stuff at predictable ages. We can tell you when they have the highest mortgage, you know, age 41 to 42, when they invest the most money in stocks and Overall, and age 54, when they have the highest net worth, age 64, you know, 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. You know, I mean, it's a science like economics, where people are guessing what the government's going to do and what is the dollar is going to go up and down and all this crazy stuff. It's a science that says, look, people, I mean, this is as predictable as life insurance actuaries predicting when you're going to die.

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

It's similar, yeah. 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 start to save a little bit. But yeah, it's a similar time. And then earnings goes down as well. People don't just save and spend less, but earnings goes down. One of the first things that happens for a certain percentage of households is women who have been working to get the kids through school and college and support the household say, okay, I've had enough, you know, and women start to leave the workforce quicker than men after age 50. So that's one of the reasons that earnings goes down. And another reason is people probably work less overtime and work less hard and advance less fast. But I mean, regardless of the reasons, you know, the statistics are clear. People earn and spend more money into age 46 to 50, and they spend, earn, and spend less the rest of their life.

Very good. So what about the issue of inflation? If you've got a large segment of the population in their mid-40s, is that going to create 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?

No, no, no, we were at that.

Now we're at that now.

When the peak comes out, the crest of boom. And you know, it's actually, it's counterintuitive, but it's the opposite. All right, 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.

Right. I read that in one of your papers.

Okay, they're 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 all these services and stuff. 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 we had the highest inflation rates in US history. And remember oil prices were 40 bucks in 1980 and they were $147 earlier this year. And we had inflation of, you know, maybe 4, 5, 6% this year. And back then it was 14, 15, 16% 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. It's called the inflation indicator, and it's a two and a half 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 then what's going to happen here ahead, and this is also kind of counterintuitive, but baby boomers are going to sense a larger generation, relatively. They're going to start to retire in the next decade faster than the echo boom enters the workforce. And that when the workforce contracts or slows, that is deflationary. So this indicator, which we. Let's see, the spending wave we came up in 1988, 1989, the inflation indicator. This thing tracks inflation better than I would have expected. I mean, even on a short term basis, it catches most of the wiggles. And it says we're going to have inflation pressures into 2009, early 2010 from the kind of boom, growing workforce in the late 2000s before this slowdown started. And then we're going to switch to deflationary trends from 2010 onwards. Again, we can go two and a half 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 think at about 16% in 1980, we went down to very low inflation, say about 1 to 2% in the late 90s. And now we've come back up to 3, 4, 5, 6% 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 going to happen again. It appears that the government's going to inflate their way out of this, which they're going to try, and we're going to get inflation, we think, first. But eventually, when the economy slows down and 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 going to have inflation in the late 2009, early 2010, if we get any type of recovery from the stimulus plan. And then the government's not going to be able to keep stimulating and inflating because inflation becomes the problem and then the economy finally goes down because baby boomers are on a real downslide in 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 to understand something like that's going to happen.

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, you know, two and a half billion people that are playing in the game that just 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, it's 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 you know, the Fed here has really realized that they just don't have control over the global economy. If it were 20, 30 years ago, you know, the Fed would do something and the US would react and it would change things dramatically. And they've used almost all of their ammo. Their last bullet in the gun is a 1% or 100 basis point decline in the Fed rate. And so, you know, they're almost out of bullets. I mean, 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.

First of all, global consumption is 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 is still going to 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 the fact that our economies are coupled, but they're not that coupled. I mean, we don't sell that much to Asia. 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 spends 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 that commodities are due to peak around 2009 or 10 and decline for a decade or so before they come back. So there's a lot of factors, but.

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

Well, it's broad. They do tend to peak together in 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 ahead. We think a huge buying opportunity is 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. So those are the two commodities. I think, you know, any rebound in the economy will be good for the whole commodity spectrum. But I think it would particularly be strong in energy and precious metals.

Okay, so back to the precious metals thing. You know, 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 because it all makes so much sense. And you know, gold should be $2,000 an ounce right now in my opinion. But the problem is it's manipulated by all the central banks that keep saying 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 is there's just a lot of manipulation in the gold market and all precious metals for that matter. I mean silver certainly too. Don't know if you study that or what your thoughts are on it, but.

I don't get in that level. But again, we do look at cycles and you know, gold did peak in 1980 at $800, near $800 an ounce and it was projected to go to 5,000 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 among the most volatile and yes, they can be manipulated and everything else. But you know, if I had to put my money in one place here near term, I think stocks are probably going to fall one more time, maybe down to stronger support around 7,000, 7,200 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%. 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.

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Sam.