HARRY S. DENT, JR.
Shifting from an airline pilot career to a financial planner in 1995, Wally Mackey found himself in the midst of a massive stock market boom. Eager to learn more about his new career, he attended a seminar presented by Economist Harry S. Dent, Jr. – a Harvard Business School Baker Scholar and working with Fortune 100 companies to forecast long range sales. Dent had published a best-selling book titled, “The Great Boom Ahead” in 1993 and had been hired by a leading mutual fund company to inspire financial planners to sell more mutual funds. The primary goal of the seminar was to encourage financial planners to aggressively move money out of the safe bank accounts into mutual funds! At the time, it was a hard sale because it involved risking the clients’ money for a seemingly greater return.
The seminar stressed two key points: (1) stock prices would increase throughout the late 1990; thus, investors would reap massive gains, but the second point Dent emphasized was a warning of a series of “Boom and Bust Cycles 1995-2023.”
After the seminar Wally Mackey immediately discovered a problem. He had been trained to sell products he now wouldn’t buy himself: mutual funds and variable annuities. Looking back over the last 20 years, “The Third and Final Dow Bubble Chart” published in 2017 shows Dent’s 1995 forecast was extremely accurate. Investors did repeatedly make and lose money again and again. Investors experienced the “Tech Stock Crash (late 1999-2002), the recovery (2003-2007), and the banking crisis crash (2008-2009), and the massive 241% run-up from March 29, 2009 to March 30, 2018. This current Boom Cycle has generated an average 26.8% annual return on the Dow Jones Industrial Average over the last nine years.
Today’s lesson is to be aware of the pending “Bust Cycle” sometime in the next nine years. Dent forecasts it will take the Dow down 83% - a decline which will bring the Dow back to the 1995 level.
FORECASTING THE ECONOMY USING DEMOGRAPHICS AND THE ADULT SPENDING PATTERN!
The Dent Method has can be traced back hundreds of years. Adults have a predictable consumer spending pattern. When combined with demographic data, Dent can forecast the economy far into the future. Dent’s method is based on five key principles. The first principle is the predictable spending patterns at different ages and stages of life.
These predictable spending patterns impact our economy, business, and product sales trends. Everything from the demand for potato chips and real estate to inflation rates, cycles of innovation, economic growth, immigration rates, and domestic migration — locally, nationally and globally – are impacted. By analyzing this information, we can successfully forecast how spending will change in the years and decades to come.
The second principle centers around who spends what in the economy and its demographic impact: Personal consumption, or what people do as consumers, represents about 70% of the Gross Domestic Product. Knowing the number of peak spenders each year is the largest influence on our economic health. Specifically, when the Baby Boomer population passed through their peak spending age, the total amount of sales began to decline.
The third principle is our birth rate and the immigration adjusted birth index: New generations come along about every 40 years. The peaks and troughs of these cycles can be forecasted by moving forward the annual number of births by 46 years.
The fourth principle is Dent’s Spending Wave. Historically, the United States generally experienced a booming economy for 26 to 28 years followed by a declining economy for the next 12 to 14 years. This happens because new generations come along about every 40 years. As mentioned above, as they age, they move through predictable earning, spending and productivity cycles. For example, the number of Baby Boomer births leveled in 1960 and 1961. Then, the number of Baby Boomer births started to decline (except of another leveling 1969 and 1970) through 1976. Thus, to forecast the economy using demographics, you add 46 to 1962 to get the peak economy in 2008. Then, the economy starts to decline from 2008 through 2023 (1976 + 46 years). The economy did begin to decline in late 2008 and would have continued to decline through 2023 had it not been for the Federal Reserve’s quantitative easing (so called money printing to buy bonds) and the near zero interest rate policies discussed later.
The fifth principle is the Inflation Indicator: Economists think that inflation is largely a monetary phenomenon. It’s not. In reality, inflation is the economy’s means of financing not only the new, young generations that will become highly productive in the future, but also the new technologies these new generations bring. The combination of a slowing economy from declining Baby Boom spending after 2010 and a slowing of workforce expansion will create a deflationary slowdown in the U.S until 2023.
The Federal Reserve started buying bad mortgages and funding the government’s debt with money out of thin air in 2009. The idea was to put money in the hands of banks to make loans as an economic incentive. Massive amounts of money showed up in bank reserve accounts, ready to be loaned to worthy borrowers. In the past, it worked because there was a demand for goods and services; and, companies needed to borrow money to warehouse products to sell. But, with a decline in the demand for goods and services, no one wanted to borrow money. So, rather than have the bank reserves sitting in low interest paying accounts, the banks bought stocks. Almost to the day the Federal Reserve started the quantitative easing policy, stock prices began to rise. Between March 29, 2009 and March 30, 2018, the Dow experienced a massive 241% run-up. Now, the Federal Reserve is in the process of reducing its bond portfolio. The banks will have to begin a massive sell off in the future, and Dent forecasts this single factor will cause a Stock Market Crash by the end of 2018.