Morning Dealer: I just found an article on SI that discusses Harry Dent's forecasts...
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The Demographic Argument: Harry S. Dent, Jr.
03-Apr-01
<<[BRIEFING.COM - Robert V. Green] Yesterday, we provided a brief explanation of
the demographic argument. This argument for higher stock prices is based on the idea
that increased numbers of people in their peak spending years are the principal driver of
the economy. The best advocate of the demographic argument is Harry S. Dent, Jr.
Here is a short summary of his books.
Who is Harry S. Dent, Jr.?
Harry S. Dent, Jr. is the president of H.S. Dent Advisors, an investment advisory firm.
A self-described "economic futurist," Mr. Dent has based his investment philosophy on
the demographic argument, and the implications of it.
He is a sub-advisor to a mutual fund, the AIM Dent Demographic Trends Fund, and a
unit investment trust, the Van Kampen Roaring 2000s Trust. Both make investment
decisions based upon the principles of the demographic argument.
He is also the author of three books, which are summarized below.
The Great Boom Ahead
The Great Boom Ahead, written in 1993, contained an uncanny prediction of the future.
On page 1, the following bold assertions were made:
Contrary to what most economists say the economy is highly predictable. New
forecasting tools tell of a coming age of prosperity with the Dow reaching as high as
8500 by 2007, mortgage rates falling to 5 or 6 percent, the taming of inflation, and the
resurgence of America as the premier global economic superpower.
In 1993, these were bold pronouncements. There were still a great deal of skepticism
about the ability of the market to sustain long growth growth, and "the coming debt
crisis" was the topic of many articles and books. Interest rates for homes will still around
9 percent, and inflation was only just beginning to receed from the 6 percent level of
1990.
But using the core principles of the demographic argument, Mr. Dent charted a much
higher future for the marketplace.
All of the basic core concepts of the demographic argument are present in this book.
The core concepts behind the demographic argument presented by Mr. Dent include:
The Generation Wave: a measure of demographic cycles, with the baby boomer bulge
due to World War II being very evident.
The Spending Wave: A shift of the bulge by 45+ years to measure the peak spending
years of the demographic bulge.
The Disappearance of Inflation: Increased purchasing power through a continual
lowering of inflation.
The S Curve: A way of viewing how markets develop and mature.
The Innovation Wave: Measuring how products enter markets, tying the entry patterns
to demographic shift.
The approach Mr. Dent takes is to use the above concepts as tools. Applied to
measurable economic data, the concepts are tools of prediction, based on empirical
data and the assumption that the economic patterns will tend to repeat themselves,
rather than follow unpredictable new patterns.
As a contrast to the powerfully optimistic picture painted for the US in 1993, Mr. Dent
also painted a grim picture for the Japanese economy, using the same core principles.
So far, the predictions made in the 1993 book are a strong validation of Mr. Dent's
approach.
The Roaring 2000s
In 1998, Mr. Dent published The Roaring 2000s. Because of the success of The Great
Boom Ahead, this second book received a lot of media attention when it
Much of the core concepts of the demographic argument are recapped from The Great
Boom Ahead, but the internet had arrived since publication of the first book. The focus
of Roaring 2000s led to the most potent aspect of the demographic argument: that the
increased spending due to the demographic bulge is enhanced by technology advances.
This idea leads to some of the more interesting investment ideas in the Roaring 2000s.
By adjusting some of the patterns from The Great Boom Ahead, Mr. Dent created a
"channel" chart for the stock market ahead. Using the Dow as a the proxy, he created a
typical range chart, such as used by technical analysts.
The "channel" charts are now a core element of Mr. Dent's arguments. Tying the market
swings to economic patterns and previous market movement patterns (mixing TA and
demographic arguments), Mr. Dent created channel charts extending out to 2009. From
them, he has made the following predictions:
A Dow of 21,500 by 2007
A Nasdaq of 25,000 by 2008
Mid-to-late 1998 is a great time to invest (couldn't have been truer)
A mid range in the channel for 2000 of 10,000 (where we were)
A low range in the channel for 2001 of 8,200 (approximately)
A prediction that 2002 will bring the market to the lowest edge of the channel
(approximately 9,000 on the Dow)
In other words, the derailment of the market in the past 18 months has not put the Dow
outside of the upward channel of growth.
Furthermore, the Nasdaq has not fallen outside the range of its channel, with an upward
prediction of 25,000 by 2008. That's a ten times return yet to go. Think it is overly
optimistic? You aren't alone, probably, but pessimism has always been the dominant
theme when great investment opportunities exist.
Somewhat depressing, however, is the fact that both the Dow is still close to the middle
of the predicted channel, and not near the bottom range of the chart's channel. The
Nasdaq has broken the bottom of its channel, but only slightly. This would imply that
lower prices are still possible, while allowing believers of the demographic argument to
continue to make their case.
You can see currently updated charts of the Dow channel and the Nasdaq channel at
the H.S. Dent foundation's web site, at www.hsdent.com. Select "Key Concepts," then
select "Fundamentals." Both the Dow Channel and the Nasdaq Channel will be
available as options.
The Roaring 2000s Investor
In 1999, Mr. Dent published the follow up to his best seller. Although just one year
later, The Roaring 2000s Investor reiterated the basic demographic argument, but
added concrete investment ideas for capitalizing upon the demographic argument.
The additional ideas presented in The Roaring 2000s Investor include:
Small caps versus large caps, and the conditions where each is favored.
Formulation of actual portfolios of mutual funds, arranged by investment profile
(Aggressive to Conservative)
Analysis of international demographics, by country.
Personal financial ideas, such as tax planning and the need for a financial advisor.
Conclusion
Mr. Dent's demographic argument goes a long way to explaining the tremendous
economic boom we have experienced since 1980. There is a certain elemental simplicity
of the idea that makes it hard to argue with.
The biggest critique that usually arises from the demographic argument is that it is not an
investable idea. If everyone knows, for example, that stocks are going to decline in
2008, won't everyone sell long before then? After all, no one wants to be the last one
out.
Another critique that is often raised is that Mr. Dent's unbridled enthusiasm is simply a
way to sell books. "Good news sells," is the counter that these critics make. And
certainly Mr. Dent's encouragement for a brighter future is a dominant them in each of
his books.
But isn't your life better than it was twenty years ago? There is no denying that the
standard of living has risen dramatically in the US over the same time period as the
demographic boom. Frankly, we concur with Mr. Dent's optimistic outlook for higher
standards of living. The future is bright, not matter what your online brokerage account
looks like today.
In the end, whether you accept the demographic argument or not, you will likely find
Harry Dent's ideas provoking. At the very least, you, as a serious investor, should be
familiar with the demographic argument. It provides a framework for analyzing market
events from a high-level perspective.
And when your own funds or stocks are down another 3% on any given day, an
encouraging big picture framework can be reassuring.>> |
