The Great Crash Ahead: Strategies For A World Turned Upside Down, by Harry Dent, provides a clue into the meaning of our past financial history with projections into the future based on an analysis of market peaks, troughs and regression lines.
Japan stimulated its economy over 100% of the equivalent GDP since 1990 and stocks fell 80%. Real estate fell 60%. Dent believes that the government stimulus should be used to cover losses banks incur in order to write down loans to real values.
This write-down would save over one trillion dollars in interest and principal payments alone. Proponents of the free market, as well as many consumers and the working poor would argue the converse stating that bad decision-making shouldn’t be rewarded. Another alternative is to strengthen the Section 8
Program and make lending more difficult for borrowers who can’t afford mortgages.
Dent believes that the dollar will bottom out and ultimately appreciate. When crisis is imminent, gold and silver approach a high and rapidly fall when the crisis hits. For investors, tight stop loss orders may be needed to protect the basic precious metals investments.
Dent mentions the possibility of a 3300-5600 DJIA by 2013, a recovery in 2014 and a sharp upward movement in 2017 and thereafter. Dent doesn’t say so; however, the historical regression line derived from 1960 to 1990 projected into this decade brings the DJIA at 4000 or less. What makes up the difference? Perhaps, the difference lies in the area of productivity gains from microchip technological enhancements coupled with a population increase nearly twice the 1960 Census.
The largest generation in history now spends less and saves more due to an impending retirement. Generational waves are seen in 1929, 1968, and 2007. Household debt is up by 7 times since 1977. Demand has declined, prices have fallen in investments like real estate, production has slowed and lay-offs have increased. The long term trajectory for real estate must be up because world population is projected to grow to 9 billion people by 2050.
Historically, the ultimate cure is to increase exports, encourage innovation of new products/services and build new infrastructure. Growing populations in Asia top two and one half billion people in China and India alone. Even small penetrations into these markets mean millions of new customers.
The baby boom generation retires this decade and that event should depress unemployment even further. Unemployment was at a peak in the third quarter of 2009 with much steeper declines projected for 2014, 2017 and 2023.
There has been a 230 year bull market since 1780. Major market peaks are 1710-1720; 1830-1840; 1920-1930; 2000- 2008 and 2040. Tax collections of the states bottomed in the second quarter of 2009 and crossed into positive territory in the first quarter of 2010. Underfunded pension liabilities are projected at four and one half times the GDP.
Dent doesn’t say so; however, part of the cure is to fund pensions starting at birth in savings vehicles that cannot be accessed until many decades later. Dent believes that the optimal investment choices will be to build cash, invest in high quality fixed income vehicles and purchase high quality corporate bonds in the 2013 time frame.
The Great Crash Ahead by Harry Dent provides an important perspective on the past with a myriad of possibilities both good and bad for the present and future. Clearly, strategic planning is in order for both the public and private sectors. Households will not be immune to the upheavals ahead. Everyone should plan.