Since AC Flyer is not around to respond, here is the latest on Harry Dent's predictions...
Time to Remember Forgotten Man Harry Dent
thestreet.com
By Chip Hanlon
RealMoney.com Contributor
2/17/2006 4:00 PM EST
It's strange writing a column knowing a significant part of the audience was lost at the headline. "Harry Dent?! He's one of those perma-bull nuts, right? The Dow 40,000 guy?"
Actually, he's positively the most bearish person you'll talk to, but the bear market he's looking for won't kick in until four or five years from now. Until then, yes -- he's more than a little optimistic.
Still, I find his thoughts worth revisiting, and not just as for his interest as a possible contrarian indicator. His ideas about the current valuations of different asset classes are of particular interest to me, and should be to you, too -- once you have a little context for rediscovering him.
He Wrote Another Book?
I can imagine your reaction to this column's headline, because I had the same one myself: I laughed when I saw his name. For me, it happened when visiting the local bookstore last summer; while searching for another book, I was surprised to spot Harry Dent's The Next Great Bubble Boom staring down at me. After my giggles subsided, I bought the darned thing.
Then I talked to him. More on that in a bit.
Dent's work, in case you're not familiar with it, is driven primarily by demographics: Because earnings and spending peak for most people in their late 40s and the number of folks in that age bracket is set to explode, an economic force unlike any in the history of man will take the market and economy to never-before-imagined heights. After rising to prominence, or at least, ubiquity, in the 1990s on the success of five books espousing his brand of demographic economics, he faded along with investor enthusiasm for the market in 2000. He's probably best known for his much-reviled early-'90s prediction that the Dow would reach 10,000.
To my surprise, an honest look at his work revealed several more accurate calls. While he certainly didn't predict the depth or severity of the market decline from 2000-02 (indeed, he calls this his biggest error), in the late '90s he predicted a correction prior to the last surge higher that would occur over the second half of that decade. Later, he was absolutely screaming near the lows in 2002 that we were witnessing the buying opportunity of a lifetime. So far, so good.
Still, it's not the accuracy of his market-timing that most intrigues me. It's the potential for his ideas to help answer the one big question I can't get out of my mind:
Why Are Assets So Expensive?
Most of us have worried for quite a while about the sustainability of the housing market and worry that it's a giant bubble, but this isn't just an American phenomenon. Just look at real estate values from New Zealand to Costa Rica and everywhere in between; it's happening everywhere. The same is true of stock markets worldwide, and bonds, too. Who the heck would buy a 10-year bond with a yield of 4.5%? Well, people are, and the trend shows little sign of letting up. (Incidentally, Dent believes rates will continue to remain surprisingly benign in years to come.)
Reading this, anyone familiar with my work prior to RealMoney must wonder if I'm a pod person from Invasion of the Body Snatchers. As recently as 18 months ago, I was one of those snarling U.S.-dollar bears and was quite pessimistic in general. However, I believe good analysts constantly check their own beliefs.
And while I can't get on board with Dent's prediction for Dow 40,000, which remains his target by 2010 or so (and would require five straight 30% up years from here), I can remain open to the underlying ideas, ones that perhaps even help explain the Federal Reserve's "conundrum" over a global savings glut. Maybe it would more aptly be called a wealth glut.
Those who can remain open to his input will be intrigued by Dent's predictions for these asset classes:
Real estate: "I agree that it's a not just a bubble, but the greatest bubble in Western history," he told me by telephone last week. "I disagree that it will pop, however. It will flatten for the next five years and the crash will come later, from 2011 to 2014." As you can see, Dent has no problem calling real estate (or stocks, for that matter) a bubble; still, while he does believe it represents a poor investment at this level, he also believes its cooling is bullish for stocks. "We have been seeing money move from bubble to bubble," he said while discussing why money that was recently targeting real estate will point back in the market's direction. For those still interested in real estate, however, he says the Sun Belt will continue to outperform, as will areas desirable to retired people.
Stocks: "In this bubble boom, we will see a new P/E range (18-30). This does mean the market will get clobbered eventually, but if you invested on historical P/E ratios alone, you would have been wrong in the '90s and you'll be wrong again," he says. "Will the market compress back to single-digit P/E ratios? I think it will come all the way back to 7500 after reaching our target first. Japan had such a bubble and lost 80% over 13 years, and their real estate went down over 60%. We'll see something similar."
Commodities: Dent generally concurs with today's popular story surrounding natural resources being driven higher by surging demand from China and other emerging economies. "Global politics has boosted it recently. We think it has peaked for now and will fall over the next year, but think it will make its way back to $100/barrel beyond that." An oil shock, he says, is his biggest concern and the greatest threat to his overall outlook.
America's twin deficits: "Yes, the U.S. dollar will collapse, but only in the downturn. Over the next few years it will first strengthen but when we finally slow down, we will be in trouble. Consumer debt isn't growing any faster than their assets, but it will be a burden when all these cycles slow."
Dent Himself as an Indicator
Perhaps most useful to the rest of us who are trying to determine the market's fate could be Harry Dent himself as a contrary indicator. Though he was everywhere in the late 1990s, he has vanished since. Dent even reports that his firm's money management revenue plummeted by 75% and his speaking engagements by at least 80% after the market's collapse, and they have yet to rebound. "Next time I'm doing 200 speaking gigs a year, sell," he teases.
Interestingly, he points out that although his best-known book, The Great Boom Ahead, was published in January 1994 (in which he made his then-outlandish prediction of Dow 10,000), it didn't start flying off the shelves until the late 1990s, when the market had already been running for years.
From a short-term standpoint, the very fact that you're reading this column about Harry Dent should scare you (it worries me, and I'm writing it!). From a long-term standpoint, however, the "Dent Indicator" suggests the market does indeed still have time to rise; his speaking and asset management numbers remain down, and his latest book isn't yet selling big.
Regardless of what I think about his price targets for the Dow and Nasdaq (13,000) over the next few years, any continued resiliency in this economy and failures of some historical valuation methodologies will cause me to at least keep Dent's thesis in the back of my mind. You might like to as well. |
