Tuesday , 18 June 2024

Dent: How to Prepare and Prosper from "The Great Depression Ahead" (+2K Views)

Most investors didn’t take warnings about the future of the economy and the financial marketplace – warnings that a ‘Category 6 Fiscal Storm’, a ‘Debt-Driven Meltdown’, a ‘Systemic Banking Crisis’, a ‘Financial Train Wreck’, a ‘God-Awful Fiscal Storm’, etc. was in store for the U.S. – seriously until it began. Perhaps this time around, before the other shoe drops, we should become more informed so we will be better positioned to survive and prosper regardless of what comes next. Words: 2128

In further edited excerpts from the original article* Lorimer Wilson goes on to say:

Some Predictions Do Come True
Such warnings and predictions were often derided as just negative nonsense coming from alarmists, ‘party poopers’, ‘Chicken Littles’, ‘perma-bears’, ‘doom and gloomers’ and the like rather than from the insightful economists and financial and market analysts who made them. To their collective credit they were all substantially correct in their prognoses of what we could expect to happen as exemplified by what actually did in the latter half of 2008 and early 2009. It cost many investors 50+% of their stock market investments, 25 – 35% of the value of their home or even the loss of their house itself, more than 10% their jobs and many more meaning full employment. Perhaps we should have paid more attention to what they said and as I compiled in the 6-part series back in 2006 regarding the “Ominous Warnings and Dire Predictions of World’s Financial Experts” followed up by a 4-part series entitled “Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure?”

Once again warnings and predictions are being put forth about the next crisis to befall us and this time around it behooves us to pay more attention and make sure this time that we are better positioned to survive and prosper whatever comes our way. Below is a major market forecast and investment advice based on demographic analyses of Harry S. Dent Jr. who has ‘been there, and done that’ successfully in the past and is once again forecasting what his research indicates is in store for us over the next decade. It should be ignored at our peril.

Dent, the author of ‘The Roaring 2000s’, ‘The Roaring 2000’s Investor’, ‘The Next Great Bubble Boom’ and his latest book entitled ‘The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History’ states that “The most important cycle change for your wealth, health, life, family, business, and investments is just ahead during the first and last depression you are likely to experience in your lifetime.”

Dent makes it clear that his predictions, while almost always contrary to most economists and expectations, have almost always proved to be correct because his predictions are based on the same sound and quantifiable logic insurance actuaries use with a high degree of accuracy to predict, decades in advance, when people will die. Dent says he applies the same science to predicting what things will happen in between birth and death – such as when people enter the workforce, get married, spend, are most productive, borrow, invest, retire, buy houses and so on. He believes that such a study of demographics and other key cycles allows him to determine the future based on the facts of the present and of demonstrated behavior so he can see the pig, or the pigs, going through the python.

With that understanding of the basis for his forecasting Dent provides 13 (befittingly) dire predictions of what we can expect to encounter in this decade in edited and reformatted excerpts from “The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History”, namely:

1. Dow will Rebound to 10,000 – 13,200 by end of 2009
A massive stimulus plan will bolster the economy somewhat into 2009 for a likely rebound in the Dow to between 10,000 and 13,200 [Editor’s note: 10,500 actual at end of 2009].

2. Oil to Retest $147 High and Possibly Reach as High as $215+ by mid-2010 Before Declining to $40 – $60 by 2015
Oil prices will likely rise to a commodity bubble peak of between $180 and $215, possibly even more, and if not that high then, at an absolute minimum, retest its 2008 high of $147, between late 2009 and mid-2010. We should then see a major crash in oil prices, beginning in 2010, back into the $40 – $60 range, and possibly even lower, between 2012 and 2015 which will continue for years.

3. Commodities will Peak by mid-2010
Commodities in general, including gold and other precious metals despite their crisis hedge qualities in the past, will likely peak by mid-2010. It will probably be 2020 or 2023 before we see the next sustained commodity boom and bubble which should last into 2039 – 2040.

4. Dow will Fall to 3,800 – 4,500 by 2012
The next accelerated stock crash, led by emerging markets, Asian stocks, financial stocks and tech stocks – and finally by oil and commodity stocks – will likely occur between late 2009 and late 2010, when most of the damage will occur, and continue off and on into mid- to late 2012. The Dow will fall at least to 4,500 and more likely as low as 3,800 by mid-2012, the 1994 low where the stock market bubble first began.

5. Nasdaq will Fall Below 1,100, its 2002 low, by late 2010 or mid-2012 at the latest.

6. Market will Rally from 2012 until 2017
A substantial bear market rally will likely occur between around mid-2012 and early to mid-2017 and then a less severe downturn will occur from around mid-2017 into early 2020 or as late as early 2023.

7. Economy will be in a Depression by 2011
The worst of this next depression is likely to hit between mid-2010 and mid-2013, especially around early 2011.
[Editor’s Note: According to a recent research paper on “Stock-Market Crashes and Depressions” by David Barro, a professor of economics at Harvard, there is a 20% probability of a stock-market crash if the economic decline is between 10% and 25% and a 28% possibility if it is associated with a major war of the magnitude of World War 1 and World War ll. Conversely, if a minor depression occurs first we can expect a market crash to follow 69% of the time and 83% of the time if the depression is major i.e. the economic decline is in excess of 25%. As such, should our current recession escalate and culminate in a minor or major depression by 2011 it may well follow that we will indeed experience another major stock market crash in 2012 as Dent forecasts.]

8. Unemployment Could Increase to 12 – 15% by 2011
Unemployment could reach 12-15%, or possibly higher at the peak of the depression.

9. Inflation will Increase until mid- 2010 and then turn to Deflation
A rise in inflationary trends from mid-2009 into late 2009 or early mid-2010 will then reverse to an ominous deflationary trend in prices, as the economy slows and all assets deflate, as they have done after every bubble boom in history. It is not that the government will not try to inflate its way out of this next crisis by cutting interest rates and undertaking public works projects, etc. but that the massive write-off of real estate and business loans will outweigh those efforts and contract the money supply.

10. Interest Rates will Increase
The Federal Reserve will raise interest rates aggressively from mid-2009 forwards [Editor’s note: this did not happen and does not look like it will happen until well into 2010 at the earliest] due to rising inflationary pressures which will contribute to the on-going crash of the stock market down to the 3,800 to 4,000 level.

11. U.S. Dollar will Decline
The U.S. dollar, which declined in early 2008 in the face of a strong stock market and which strengthened considerably during the Crash of ’08, is likely to decline again into 2010 – 2012 as the stock market declines considerably further. The dollar will then strengthen again before we see the second milder stage of the depression between mid-2017 and early 2020 or 2023.

12. Housing will Decline by 40 – 60% from October 2008 Levels
A more severe deflation cycle in housing will begin between late 2009 and mid-2010 and will likely last until somewhere between mid-2011 and 2013, and possibly as late as early 2015 in larger homes. During that period the average American house price will fall at least a further 40% and as much as a further 60% from today’s (fall of 2008) market prices.

Housing has remained essentially flat when adjusted for inflation over the last century except during the extreme bubble after 2000 and the deflation cycle of the early 1900s and 1930s. As such, the current grossly overvalued house prices of today, coupled with expected rising unemployment deflationary trends and the continued real estate slowdown due to the aging of the massive baby-boom generation, will likely make such a decline in house prices a reality.

13. Greatest Economic and Banking Crisis since the 1930s will Occur Between 2010 and 2012
Dent concludes by saying “If you thought 2008 was scary, 2010 to 2012 will be the greatest economic and banking crisis since the 1930s. You must be prepared in advance to survive this most difficult season. Do not accept the proposition that you cannot, or should not, take steps to guard against losses. As an investor, it is your money, your future, and your responsibility to protect yourself in the best way possible and there will be the greatest reward for those who do prepare during this once-in-a-lifetime ‘great sale’ in financial assets.”

How Best to Invest and Prosper during the Tumultuous Times Ahead (according to Dent)
1. Early to mid 2009:
a) Sell stocks [Editor’s note: markets actually went up + 60% from low of March 6, 2009], except commodity and energy sectors.
b) Allocate between commodities and T-bills or money markets and /or safe currencies.

2. Late 2009 to mid-2010:
a) Sell commodities and commodities and energy stocks.
b) Allocate 100% to T-bills or money markets and safe currencies.

3. Mid- to late 2010:
Start to allocate to 30-year Treasury bonds only after their yield begins to spike.

4. Late 2010 to mid- 2011:
a) Allocate to 20-year corporate bonds when yields go to extremes.
b) More conservative investors should focus on AAA corporate, more aggressive investors toward BAA.
c) All investors must recognize, however, that even high-quality bonds will be in question as to their viability, given that the downturn between mid-2009 and 2012 is anticipated to be more extreme than anything we have seen since the early 1930s, mid-1970s, or early 1980s.

5. Mid-2011 to mid-2012:
Allocate to long-term municipal bonds when yields seem to be peaking (high-tax-bracket investors).

6. Mid- to late 2012:
a) Aggressive/growth investors: allocate majority into Asian stocks and lesser into U.S. multinational, technology and health care, with minor allocation in long-term corporate, Treasury, or municipal bonds.
b) Conservative investors: focus largely on 10- to 30-year Treasuries and 20-year corporate AAA bonds, with minor allocations in multinational, health-care, and Japanese stocks.

7. Late 2011 to early 2015:
Look for selected opportunities in real estate (small condos and starter homes early on; vacation and retirement homes later; trade-up homes by 2015).

8. Mid- to late 2014:
Aggressive/growth investors: allocate more to leading stock sectors such as China, India, health care, multinational, technology, and financials on a likely short-term correction between late 2013 and late 2014.

9. Early to mid-2017:
a) Sell stocks in all sectors.
b) Convert largely back into long-term bonds and, to a lesser degree, into T-bills or money markets.

[Dent goes on to provide additional advice on which assets to invest in up to 2036 which I have excluded here as our interest and focus is much more short-term given our current economic, fiscal and investment environment.]

Before you dismiss Dent’s assessment of what the future holds for us consider this: ‘The Great Depression Ahead’ was written in the fall of 2008 yet Dent projected on page 56 that:
1. many banks would:
a) fail – that has and is happening;
b) have to merge with others – that has already happened;
c) have to be bailed out by the government – that has already happened;

2. the Fed would have to cut short-term interest rates to near zero – that has already happened;

3. the federal deficit would soar to in excess of a trillion dollars – that is already a reality and

4. the 30-year Treasury bond would eventually fall to something like 2% in yields and that is developing.

Dent has a knack for telling us what we would rather not hear but it behooves us to make the most of his insights for what they are worth. Dent encourages everyone to apply for his free periodic e-mail updates to his basic forecasts and investment strategies and to check out ‘Free Downloads’ at www.hsdent.com for further and more current information.