Transcript of Harry Dent Jr. interview on (TV show) Wall Street Week with Fortune (magazine)............................
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Air date: November 26, 2004
Harry Dent Jr. interview
KAREN GIBBS: Most market watchers see a trendless market going into 2005 and beyond, but one prognosticator is bucking the trading range trend. Harry S. Dent, Jr., money manager and author of The Next Great Bubble Boom, says get in now, as we're in for another ride like the Roaring Twenties. Harry, nice to see you.
HARRY DENT: Nice to be here, Karen.
GIBBS: Well, you've got some very provocative ideas in the book, but I didn't really have to dig deep into it. Just looking at the jacket cover gave me a little pause here. You're predicting that the Dow could be at 14,000 by the end of 2005, and at the end of the decade we could see the Nasdaq at 20,000. Excuse my skepticism, but these numbers really sound off the chart.
DENT: No, they do. Actually our targets for the Dow by the end of the decade are 35 to 40,000 and for the Nasdaq our most likely target is 13,000. It could go as high as 20, but if we had to bet today, I'd bet 13,000. Now that sounds outrageous. You've got to remember, it got up to 5,500 faster than anybody thought in the late '90s. That is the same gain the automotive index, the tech indexes made in the Roaring Twenties after the crash, and that's a similar gain that the Dow made from 1922 to '29 from the bottom to the top. So we've also got another chart in the book that's interesting.
We show something called the Dow channel. Since the early '80s when the baby boomers started driving this boom with their rising spending and productivity, the Dow's been going up about 15 percent. We just hit the high end of that channel in '99, early 2000.We hit the low end in the correction. And if the Dow just keeps going at the same average rate since the early '80s, we're not asking for anymore than that, we do hit 40,000 by the end of the decade. So that's our best target. If it hit 30,000, I think most of the listeners would be happy.
GIBBS: You also say that you think the S&P is about 40 percent undervalued right now. And let's say we're at 1130. That's saying that the S&P 500 should be somewhere between 1500 and 1600.
DENT: Yeah, and we expect to see that next year, frankly. We expect to see the Dow at 14,000 plus by the end of next year and the S&P 500 over 1500 and the Nasdaq close to 3,000. Now one of the best long term indicators for valuations, you simply compare bond yields with the yields on the S&P 500, the earnings of the S&P 500. And it shows, yes, the S&P about 40 percent undervalued, and nobody wants to buy. But you've got stocks this undervalued with the demographic trends, baby boomers pointing up, and they never stop spending in this downturn. And you've got these technology cycles going straight from 10 percent in 1994 to 90 percent still zooming up. This is the investment opportunity of a lifetime from our point of view.
GIBBS: Well, your book title is kind of confusing to me, The Next Great Bubble Boom, and bubble brings feelings of 2000 when we crashed and burned. How can you have a bubble and a boom?
DENT: Well, we had one in the late '90s. Our book The Great Boom Ahead saw that coming way back in the early '90s when people thought like today, oh, you know, America's seen its best days, we're too much in debt, the deficit, the Iraqi war, the S&L crisis. But we had two important indicators. Baby boom spending, the simple, predictable demographics of when people spend the most money, and we've tracked technology cycles throughout history and know where we are on them. And we said, you know, technologies are going to accelerate into the mainstream of our economy. It's going to drive up productivity, create new growth industries and an incredible stock market. Now those two things happened.
GIBBS: But you know, we see these boom cycles, these bust cycles, and then they're followed by periods of trading ranges, kind of painful. I'm thinking of like '74 to '82 where the market just, maybe a 1,000-point trading range for the Dow, and then '87 to '91, another just dead in the water period. And we're coming off the bust of 2000 where baby boomers got burned and are very, very shy of the stock market. How are they going to play into helping this scenario play out?
DENT: Well, the thing is they're going to continue to spend and continue to invest. I mean that's what our indicators show. Demographics are very projectable, very predictable. The problem is people are getting whipsawed by this bubble boom. I mean what we tell people is not that a bubble has burst. We are in a bubble boom, and that's difficult for investors. '87 was the first bubble. People forget that, 40 percent crash like that on the Dow. That burned people. And you know what? Everybody said it's over after that. Then we get a bigger bubble.
Now we've got one more coming. People, baby boomers in particular, need to take advantage of this boom because after that baby boom spending will decline, put us in a declining economy for 12 to 14 years, just like the Japanese in the '90s and early 2000s. The U.S., you said that extended bear market, '68 to '82 stocks were down, 14 years. In 1930 to 1942, 13-year bear markets.
Generations earn and spend more money. We show this in a chart called "The Spending Wave," as they're moving in greater numbers to their peak spending years, which we can quantify. It's age 46 to 50. And then there's a decline with the baby bust to follow until the next generation comes along.
Every 40 years we get extended bear markets and people are surprised. They shouldn't be any more surprised at that than getting cold in winter in November. We chart these cycles, and it's important to take advantage of this next boom and bubble, because from 2010 to 2022 our spending wave is pointing down, just like it did for Japan in 1990 to 2003.
GIBBS: I can understand how we're going to see a fading back say after 2010, 2012, but I don't see how we're going to get there, particularly when we're facing situations that we've never faced before. We have never had so much geopolitical risk in the marketplace. And we've got foreign investors that are concerned about the falling dollar and what that does to asset values.
DENT: You know, things follow these trends. When you get a down market, value stocks do better than growth. The dollar's going to fall. Government deficits go up when the economy slows. We predicted in 1992, again way ahead of the boom and bubble, that not only would we have a boom and bubble, but the government deficit would disappear by 1998 to 2000 because the economy which strengthened the government's finances, rising taxes, falling inflation, which our indicators predicted would lower the cost of financing.
We see that again. This deficit will reverse. The U.S. will lead in growth again. The dollar will rise, so the dollar also follows these cycles. We get a bigger downturn, we lower interest rates to stimulate our economy more than Europe and other countries, our dollar falls. We have a high deficit, our dollar falls. All of those things will reverse. So we keep our eye -- economists always get kind of confused by all these things, interest rates, dollar, currencies -- we keep our eye on the ball. It's the demographics of generation spending and productivity cycles, and it's these new technologies that increase productivity and create growth industries that actually drive our economy. It's important to know where we are on those cycles.
GIBBS: Boomers aren't one to embrace new technology, though. How do you see boomers pushing this next boom, especially in the technology arena?
DENT: Well, you know, they have. We all say we resisted, but in 1994 cell phones hit 10 percent of households. This is a principle in our book we call the S curve. It takes a long time to get to 10 percent, but all of a sudden, you hit critical mass and things accelerate to 90 percent. Cell phones hit 50 percent in 2001 right in the middle of this crash and they're going to hit 90 percent by the end of this decade.
GIBBS: You're certainly moving against the grain here, because what I hear you saying is that we should be investing in technology now where everyone is saying stay away, don't touch it.
DENT: Nobody wants to touch it, yeah. It was the same in the early '20s. You see this big crash in tech stocks. Again, General Motors is doing the same thing Intel did 80 years earlier. We've got a chart in the book that shows General Motors 80 years ago in the last revolution -- that's about how long we have these revolutions, about every other generation -- crash, bigger boom. General Motors went up 22 times from '22 to '29, and people were saying the same thing, the tech revolution's over, I don't want to touch tech stocks. So tech was going to lead this next boom like it did in '95 to '99.
GIBBS: Baby boomers aren't the only ones driving this economy now. In fact the new term is the echo boomers, the sons and daughters of baby boomers. The outlook doesn't look so good for them though does it?
DENT: Well, you know, it's tough. They're going to have a very good job, they're just coming out of school, a lot of them, and they will be for many years, and they're going to have very good job prospects. They're going to be scarce, so they're going to be in demand during this boom, but a lot of them are going to be coming into their peak career cycles when this economy is slowing from 2010 to 2022. So they have a challenge in careers and jobs.
The baby boomers have the challenge of, "Oh my gosh, what's going to happen to our retirement funds if the stock market doesn't go up at 10, 12 percent a year like most people expect?" So again, people need to get these good jobs, get with good companies now. I'm telling a lot of younger people don't stay in school forever. Go and get a good job and advance your career while the economy is strong. If you want to go back and get a masters degree, do it in the downturn when it will be easier to get in a good college.
GIBBS: Okay. So you're saying for baby boomers get in on this train now. Don't wait for the market to start rallying, jump in and ride a pretty good rally up to 2010. At that point, what should investors do?
DENT: 2010 to 2012 is the danger period. We think that's when the next bubble will peak and the next crash will come. There is nowhere to hide in a time like that. Even real estate will be down by then. So you need to be in high quality fixed income. Now a lot of baby boomers investors may want to just ride out in corporate bonds and fixed annuities. Stocks aren't going anywhere, real estate's not going anywhere. But people who want to turn around and invest again, say once you get a major crash, let's say by mid-to-late 2012, you could start investing in health care and drug stocks because baby boomers are going to keep spending money on that. And incredibly Asia is going to be the part of the world, Europe is going to decline forever after this boom, we're going to start to plateau in the U.S., Asia will have incredible growth opportunities and continued consumer spending trends.
GIBBS: But along with those incredible growth opportunities comes lots of volatility. How much would you suggest Asia can take up of the portfolio?
DENT: We find that Asia should be 10 to 20 percent of your portfolio, because Asia helps to diversify against U.S. stocks. But if you put too much of Asia in your portfolio, the volatility starts to get you and it hurts more than helps.
GIBBS: You also back tested to the fifth year of the cycle, and is this why you're saying 2005 is just going to be a monster?
DENT: Yeah, there's two things about this decennial cycle. You do tend to get a downturn in the first few years. You tend to recover those losses in year three and four in most decades. All the gains in the stock market over time are made in the fifth through ninth year, the second half of the decade. Even in bear markets like the '70s and the '30s, you would have made money from the fifth through nine years.
When you look back, what's the best year in the cycle zero to nine? It's the fifth year. The fifth year has never been down in the last century. The fifth year has averaged 34.6 percent gains. Nobody's expecting the stock market to do that, anymore than they expected such a strong recovery in 2003. Every cycle we have says next year is going to be a strong year. If you don't get in here around 10,000 on the Dow, you're not going to see 10,000 for a long time and you're not going to get another opportunity like this.
GIBBS: Is there anything that could throw this scenario out of kilter?
DENT: You know, our biggest concern is the geopolitical scene.
Terrorism is not new. We actually had the first terrorist attack on America, a bomb on Wall Street in the early '20s, and that caused huge anti-immigration ethic in this country and had a lot of affects, and we had the Roaring Twenties anyway.
But, you know, this is a big thing, and you seeing something like 9/11 that, I mean four months, I was in New York four months after that, and condo prices were skyrocketing again. So it didn't stop people from buying houses, didn't stop people from doing business. But if we had something really major happen, that would be our biggest worry.
We're actually more worried (that) the terrorist type of threats come more and geopolitical conflicts come more in bad times than good times when people are dissatisfied. I mean, we don't consider it an accident that Hitler came out of the Great Depression and World War II came out of that. So we're more worried about that from 2010 to 2022, but that is the wild card.
We've also back tested and shown that when there is political crisis, the markets tend to be down for a few weeks, but tend to be at new highs within six months. They usually are buying opportunities. The Cuban Missile Crisis, the beginning of World War I, Pearl Harbor, the assassination of Kennedy, you know, all these things. The markets react, but demographics and technology cycles still drive the economy, and so those are still pointing up. Those are buying opportunities.
GIBBS: Harry S. Dent, Jr., thanks very much for joining us.
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