Economic soothsayer Harry S. Dent Jr. takes issue with those who call him the ultimate pessimist, Tampa Bay's version of Dr. Doom.
After all, this was the same guy who in 1992 wrote The Great Boom Ahead, accurately forecasting the stock market and economic surge of the '90s. Back then, Dent says, conventional wisdom was that Japan was trumping the United States. He was ridiculed as a "perma-bull."
Now, the tables have turned. Dent is bracing for an economic crash that will make the financial crisis of 2008 and its aftermath appear tame.
Part of the blame falls on banks, politicians and spendthrift consumers who couldn't say no, Dent says.
But he also blames the unstoppable tide of demographics. Aging baby boomers who drove the economic prosperity of the '90s during their peak spending and earning years will, as retirees, suck capital out of the market.
As a result, he sees a deflationary spiral in the next few years when both prices and incomes drop dramatically. Housing prices in Florida could tumble 30 to 35 percent more; the Dow Jones Industrial Average could plunge to as low as 3,000, down 70 percent from current levels.
"Stockbrokers don't see it. They're going to get killed," Dent said. "They're going to tell people, 'Hold on. Don't panic. The markets will come back. We've got you diversified.' And (stocks) are going to hell in a handbasket across the board and they're going to shoot that broker."
Not all Dent's predictions come true. In 2000, he forecast that economic growth would drive the Dow as high as 40,000 during the decade.
His newest book, which comes out Sept. 20, is titled The Great Crash Ahead: Strategies for a World Turned Upside Down.
Rodney Johnson, Crash co-author and president of Dent's Tampa-based investment adviser firm, HS Dent, said they toyed around with 15 or 20 other names. Even The Great Deflation Ahead, which Johnson said was too "unemotional."
Dent, 57, and Johnson, 45, practice what they preach. Both have sold their homes and are renting until the housing market bottoms out.
The duo sat down with the St. Petersburg Times last week to outline their predictions and suggest ways consumers and investors can protect themselves. (And, no, they say, buying gold isn't the answer.)
In your 2008 book, The Great Depression Ahead, you predicted the markets would already have crashed because of our debt overload and aging baby boomers. That has yet to unfold in its entirety. Why another book? Why now?
Dent: A lot has happened between now and then. The two big ones are the Fed and China. We've had unprecedented worldwide stimulus and (through the Federal Reserve's action) we've thrown $2.3 trillion at the economy.
Johnson: We said the market was going to go down in '08 and '09, and it did. We said you're going to get a little bit of a bounce, and it did. Then we said it was going to go down in late 2009, and it didn't. (People say) you missed the recovery. I'll tell you what we missed … we didn't see $2.3 trillion printed out of thin air.
It's so hard to get people to put themselves back in 2005 or 2006 and say, "What would happen if we print $2.3 trillion overnight?" Everybody would say the dollar would go to zero and inflation would be 40 percent and there would be riots in the street over gasoline at 20 bucks. And it didn't happen.
Instead, what we had is a very flat response because the deflationary pressure is still there. We still have the chargeoffs in mortgages and credit cards.
So all that the stimulus and Federal Reserve infusion of money did was postpone the day of reckoning?
Dent: It prevented deflation and deleveraging.
Johnson: We should have had massive inflation from this, but we don't. They balanced the teeter-totter. What we're all doing on the private side is paying down debt, not spending more. Wage compression is going on. The Fed has done everything to create inflation because they desperately need home values to go up … and they need wages higher. They're not getting either one.
The great risk is to be lulled into a false sense of security, to think: "Okay. We've come through it. We're on the other side and now we're back to growth." No, no, no. We didn't solve any of the issues. We just pushed them out. The Great Depression Ahead we thought would be a clear road map for where we're headed. What happened is the government basically moved mountains to push it out two years without solving anything.
Dent: And they've made it worse. We've added more debt. More home loans have been made with 3 percent down to families that aren't going to be able to afford it.
Why didn't the stimulus work?
Dent: A lot of this was desperation to stimulate an economy that was unstimulatable. Why do we say that? Most of the prime consumers in our time, the baby boomers, are moving in to their 50s and 60s. Old people don't spend money. They save for retirement. They bribe their grandkids. They travel a little. They do not buy a bigger house; they only downsize. They don't drive cars half as many miles because they're not carting the kids around.
So we're trying zero-interest rates. We're pouring money into the banking system and building reserves. … The government is just throwing money into the economy to make a difference and keep the banks from falling down. In reality, housing hasn't bounced (much) at all. It's going to go lower. The banks are dead. They were already dead in 2009. Schedule the funeral now. They already lent against housing that failed.
How much further will housing prices fall?
Dent: Back to where the bubble started. That's a big rule we have … whether you're talking tulips, stocks, commodities, foreign or U.S. housing — most bubbles go back to where they started or a little bit lower. … Housing started to go exponential at the beginning of 2000. That's the minimum. For housing to get there it would have to be down 55 percent nationwide. The other target we have is down 65 percent, which would be the lows in '96-'97.
Wherever you are (in the country) anybody can look at that and get some gauge. If I'm in Dallas, maybe you have another 5 percent to go. If I'm in Florida, maybe I've got another 30 to 35 percent.
If you're right, how do people prepare for a deflationary environment?
Dent: Buy gold and get a Conestoga wagon. Just kidding.
People are worried about stocking shelves and food and buying gold and silver. Food probably makes sense. But gold — and we said this in the book — there is bubble after bubble, and the last bubble will be precious metals.
Silver will probably go down more than any single asset. More than oil, more than commodities, more than U.S. stocks, more than Chinese stocks, housing. Silver is the greatest bubble. It went from $4 or $5 recently to $50 and then came back down to $33. Probably it will end up going back up to $50 and then crash. Maybe to $5 or $10. Gold will go from around $2,000 and crash back to $400 or $500.
How soon will gold fall?
Dent: I think it starts next year. Stocks are in the first wave down of the crash we talked about. They go down a little more in October and then come back year-end. I think there will be some surprising strength in the U.S. economy, kind of a catchup to the Japan and oil shock that economists have been talking about but hasn't happened yet.
So if stocks go down one more time, I expect gold to go up one more time. But then — like in the 2008 crisis when the economy started to melt down and banks were failing — gold will go down. The only thing that went up (after the 2008 crisis) was the U.S. dollar. Gold went down 32 percent, I think it was. The U.S. dollar went up 23 percent.
So investors can't make money through stocks, real estate, even commodities when deflation takes hold. Any good things about deflation?
Johnson: There's some great things about deflation. Housing, in particular, you start with because it's the biggest asset. It reprices assets to a more affordable level for those that follow. We ran up asset prices dramatically … because debt was so easy to come by. There was no risk because the Fed held interest rates so low. We're back to understanding risk. We're pricing assets back to where the next generation can afford it, which is a wonderful thing. We're purging, and that's what it should be.
Can the government do anything to mitigate the degree of the crash or forestall deflation?
Dent: Here's the dilemma because of the slowing demographic: There's no tax cut that's going to generate a ton of jobs and 5 percent growth in the economy again. There's no stimulus plan. The Democrats say we should have had more stimulus and the Republicans say you shouldn't have stimulated at all; you should have cut taxes. Neither of those plans is going to restore the economy because of the debt and demographics.
The only thing government can do is relieve people of debt that no longer makes sense. Forget the government debt of $14-$15 trillion, going up to $20-$25 trillion. Since 2000, we went from $20 trillion to $42 trillion in private debt. Government debt went from $5 trillion to $10 trillion.
Why don't we give money to banks only to the degree they mark down loans to fair market value? Why doesn't the government deleverage debt in a civilized manner? If you have slowing demographics and slowing business, the only way to generate cash flow is to take the debt off the backs of consumers. … Let the government orchestrate a Chapter 11 like we would do to a business that is still viable but has too much debt.
Let me run some numbers by you. Still think the Dow will fall to around 3,800?
Dent: We've got a range of 3,000 to 5,600. Again, bubbles go to where they started. The stock bubble started in late '94. So 3,300 is where a lot of our projections point from different models.
It'll (hit bottom) somewhere between late 2012 and late 2014. Maybe in 2013 you'll see the bottom. If this government, like Japan, can keep stimulating, keep finding new bullets as they have thus far, it could affect timing. But (the Fed) is really running out of bullets.
How high do you see unemployment going?
Johnson: Thirteen to 15 percent.
Dent: And more like 25 percent when you consider the unofficial number of people who have given up looking for work. That 25 percent is Depression level. Even 15 percent is way more than we saw in the worst of '82.
On an optimistic note, you've said the 2020s could be the start of a wealth creation opportunity of a lifetime.
Dent: The U.S. stock market is not going to go from 7,500 to 14,000. It's not going to have that run, but you're going to be buying it down 70 or 80 percent. The winter season (after prices have fallen) is the buying opportunity of a lifetime for people who don't lose everything and still have some powder left.
The U.S. will never see a boom like (the 1990s) again, at least in our lifetime or our kids' lifetime.
With the next boom, I think India and the Middle East is where it's going to be at. The Middle East is going through this whole revolution. It may take them 10 years, but by the time we get to this next boom, the demographics in that area that have the ability to go beyond banana republics, they're going to really run. India is going to see its best days ahead. China in between.
Our situation is often compared to Japan's economic winter that's been going on for 20-plus years. Could it last that long here?
Johnson: We're optimistic about the United States because we're not Japan. We have young people. We actually have this generation coming along in a decade or so.
Dent: We have a substantial generation to follow. Not as big as the baby boomers. Japan has a little blip and that's it. Europe has no echo generation. Europe is done. Europe is a retirement community in debt.