After the Crash the Next Great Bubble Boom (Part I)
Stock-Markets / Financial Markets 2009 Mar 02, 2009 - 03:14 PM GMTBy: Oxbury_Research
“A devastating crash occurs between 2010 and 2012, which ushers in a thirteen-year bear market into 2022” -Harry Dent Jr. This quote is taken directly from the back of Harry S. Dent Jr.'s bestselling book, The Next Great Bubble Boom . Mr. Dent was a pioneer in the study demographics and their relation to the stock market. Before we dive into certain specifics and reasoning behind what is shaping up to be an ominous prediction, it is important to sift out why this renowned author came to such conclusions in the first place and if anything has changed since the book was published in 2004.
Mr. Dent makes the claim that for the first time since the early 1980s we have been able to utilize the information age to access and analyze reports from Consumer Expenditure Surveys, which are conducted by the U.S. Bureau of Labor Statistics. This was done in an effort to project economic trends and their impact on the marketplace.
Why go through all the hassle of learning every minute detail of population behavioral habits? The answer is simply to predict stock market movements and pinpoint which sectors will perform best as well as those investors would be better served to stay away from. Essentially, it's about gaining a profitable edge and exploiting the value of good information.
Three Stages of Economic Impact
Mr. Dent points to three stages of being and their effects on society. At first, you will grow up and become an expense to your parents, the government, and business. This is an obvious observation I realize, but an important precedent when it comes to understanding how our markets fluctuate. Second, you naturally enter a second phase, which is workforce entry. This stage marks the beginning of a person's productive period. And finally, a later period during adulthood which gives us incredible insight into data that includes spending, borrowing, saving, retirement, etc.
Among all this intricate information lays a foundation of demographic trends in population and aging, and technological innovation. According to Mr. Dent, this has allowed us to make predictions with increasing accuracy unlike anything we've been able to do in the past.
A U.S. Lost Decade?
Similar to Japan's Lost Decade from 1990 to 2003, The U.S. has entered a persistent downturn in the market that is to some considered the worst since the Great Depression. Why? For starters, statistics show that the quantifiable peak in average household spending occurs at the age 46 to 50. Now, consider the fact that consumers make up roughly two-thirds of spending in the U.S. and the largest demographic segment, the baby boomers, are quickly moving beyond their peak spending age. It doesn't take long to connect the dots to see what's in store for the U.S. economy.
Unfortunately, this time around we won't have much in regards to savings in an effort to bail us out. After business reels in spending, the government is expected, as is the case today, to step in and throw unprecedented amounts of money back into the entire system just to keep it afloat.
Dent goes on to say that by 2015, U.S. unemployment levels could reach 15%. And in an effort to lessen deflationary pressures, government deficits will hit unprecedented levels relative to GDP due to falling tax revenues and rising social costs. Unlike historical attempts by the government to successfully support and even lift a faltering economy, this time around may not be so easy. As previously stated, the demographic trends, similar to what Japan saw from 1990 to 2003, will likely take hold and suffocate any sustained buying interest in the equity markets.
Thoughts on Harry Dent Jr.'s Predictive Analysis
In my opinion, Harry Dent Jr. was on to something with demographic analysis, albeit he was perhaps only a few years off. The cycles he refers to have occurred, but in a much more rapid fashion. For example, he stated that we wouldn't see a significant drop in major market indices until late 2009 or early 2010. The downward slide in our market occurred near the end of 2008. Under his original assumption we may have very well seen a one-term John McCain elected president, followed by an FDR-like figure to sweep into office during the 2012 presidential cycle in a landslide victory. In reality, this FDR-like character, Barack Obama, emerged much sooner than anticipated on the heels of our recent market collapse.
For a book written in 2004, Dent makes very insightful discoveries. If one thing is certain, it is that information and the world economy moves slightly quicker than the day before. Economic cycles are much more turbulent in the short-term, becoming more reliable in the long-term. Instead of dismissing Dent's analysis outright, I'd simply run simulations on reports from Consumer Expenditure Surveys on a more frequent basis to see how far from the initial set of data results taken in 2004 we have truly deviated. Perhaps the rate of this deviation holds the key to making accurate market and economic predictions.
Additionally, one may also wonder whether the data found within these Consumer Expenditure Surveys can truly be trusted. If government is transparent, then predictions may hold under their respective time frames. Otherwise, debts and losses for example, may be hidden in a way that undermines the analysis and the confidence of those invested in the market.
In the next article, I will go into much greater detail regarding Dent's analysis and which sectors will be attractive for investors to reap big gains in the years ahead.
Good investing,
Stanley Barnes
Analyst, Oxbury Research
Disclosure: no positions
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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