(And urbanization, hence “Sex and the City”, but more on that in a moment!)

One of the most…interesting presentations at the Casey Conference was Harry Dent.

Harry is the founder and president of the H.S. Dent Foundation and is a strong believer in using demographics to predict consumer behavior and to forecast economic trends.

He has been in the prediction business for decades, which granted must be an extremely difficult business to be in—I know Doug Casey and Rick Rule never make a prediction with both an event and a date, because the future is simply too complex and uncertain, and I personally shy away from anything even remotely resembling a crystal ball here on Kung Fu Finance as I am quite positive that the ironic nature of the universe will love nothing more than to mock me and “show” me just how wrong I am!

Harry, however, has no such qualms (much like Porter Stansberry, who recently made the bold prediction of $40 oil by the end of this year), and to his credit, Harry has made some spectacular calls over the years:

  • He accurately forecasted the unanticipated “boom” in the 1990’s in his 1993 book, The Great Boom Ahead
  • He called for the next great depression to start in 2008 in his aptly-titled book, The Great Depression Ahead in 2008
  • He correctly forecasted in his 1989 book Our Power to Predict that Japan was about to enter a long-term deflation of stocks and real estate that would last more than a decade, and that the DOW would reach 10,000 (both of which seemed inconceivable at the time)

However, before you get too excited, realize that he has also made some spectacularly not-so-good calls:

  • In 1999, near the tail end of one of the longest and most powerful bull markets in U.S. history, Harry released his book, The Roaring 2000’s Investor, confidently predicting that the Dow would hit 44,000 by 2008 (as we know, he was off by 30,000 points or so, and that’s going by the pre-crash 2007 high of 14,000+.)
  • During that time he also argued forcefully for NASDAQ stocks and said that “the technology revolution will favor Internet-oriented companies,” but within three years the NASDAQ lost three-quarters of its value and the leading index of Internet stocks plummeted 89%.
  • He also published his book The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006-2010, which we know was clearly not a boom—that was our recent catastrophic financial crisis and the biggest stock market bust since the Great Depression. In his book he argued that the Dow would hit 40,000 by 2009 (it instead hit its lowest point in more than a decade, plummeting to 6547 in March of 2009.)

His latest book, The Great Crash Ahead, predicts that government stimulus will fail and that we are in for a deflationary collapse (as opposed to Jim Rickards’ inflation argument.

It’s fascinating to me…after listening to them both, they are actually more or less in agreement about several important points—they both believe another crisis will occur soon and that governments and central bankers will react by printing more money. Where they do disagree the most is on whether or not the governments and bankers will be successful in their inflating.

Jim Rickards thinks central banks will run the printing presses as far as the eye can see, and Harry Dent believes that they will try, but that they will eventually be forced to stop either by the market or by the population who will finally realize all of this printing is insane.

I gave you Jim Rickards’ side last week, so this week I present you with Harry’s side (so you can make an informed decision on what you believe after hearing both cases!).

So without further ado, here is Harry Dent:

Harry Dent – A Decade of Volatility

I may not agree with everything Harry Dent says, but he is definitely an entertaining speaker.

He cut right to the chase—as I said above he thinks we are in for deflation in the years to come, and he did his best to illustrate exactly why (to a tough audience by the way…it’s no secret that Casey Research, like Jim Rickards, leans more toward inflation in the future, although they can also see a case for short-term deflation first, followed by inflation).

Harry brought up Lacy Hunt and John Maudin’s charts of the world’s greatest debt bubbles, in 1873-74 and 1929-32, and asked what followed those debt bubbles, inflation or deflation?

(Kung Fu Girl Note: Yes, those were both deflationary collapses, but let’s not forget the infamous Weimar hyper-inflation in Germany, among others, also brought on by too much debt!)

Harry is definitely a categorizer of people, and tends to generalize human behavior (he studies demographics after all, which does exactly that, and is known for his core premise of “Demographics are Destiny”).

At the Casey Conference (as in many investment conferences, I am learning), there were many more men than women in the audience. Harry looked out and noticed this and stated that women would “get what he said” much more quickly than the men would for two reasons:

  1. His company looks at the economy in terms of the family life-cycle of spending and the typical things people do as they age, and Harry says that women understand that right away, and
  2. Men tend to think that they already understand economics and politics, and that thousands of years of evolution have taught men “if you don’t look like you know what you’re doing, you don’t get laid.”

(Once again, no mincing of words at the Casey Conference!)   🙂

He recited the old adage about no matter how lost men get, they will never, ever ask for directions, and said that is also why it takes one billion sperm to hit just one egg.

His point was to try to open the men in the room’s minds and to have them suspend what they thought they already “knew” about economics for 30 minutes and to give him a listen.

He brought up the fact that his company predicted the Japanese decline in the late 80’s when economists said that Japan would be the #1 economy, but Harry said he knew that it was “simply demographically impossible”.

He also said that his company predicted the current crisis and downturn 20 years ago.

(Kung Fu Girl note: this is true, and I do believe that demographics are a part of the economic picture—I just don’t believe they are the whole picture. Robert Kiyosaki also predicted the stock market crash of 2008 based partly on demographics, but drew entirely different investment conclusions than does Harry…it’s always interesting to get differing perspectives but make sure to always think for yourself and draw your own conclusions!)

Harry’s company looks at different factors than most economists. He said that he has many disagreements with economists because most economists tell you not to listen to anyone who tries to predict events past the next election cycle.

Harry conceded that predicting short-term events is difficult. Politics can make short-term market swings “unbelievable” (as can many other things…), but he says that predicting the long-term is a “piece of cake”.

Harry believes that you can see all of the key economic events and trends that will impact your life and business and investments over the rest of your lifetime, just by looking at demographics.

Why do economists miss this?

Well, according to Harry, economists miss this because they do diligent research but don’t “live in the real world” and tend to focus on the symptoms of the problem instead of the causes (for example he said that the money supply is a symptom, not a cause).

(Kung Fu Girl Note: In general, I am one of the most agreeable people you will ever meet, but I found myself wanting to contradict him or say, “But what about…” after many of his points!)

Harry professed that economists get so caught up in all of their detailed indicators that they end up missing the forest for the trees (and he made a joke about economists being people who aspired to be accountants but just didn’t have the personality…).

So what’s happening today?

According to Harry, a few things, and they are really simple.

He said that he is not a currency expert nor is he a political expert, and said that was “difficult stuff”.

Instead, he prefers demographics, which he says is very simple and powerful.

One of the most important numbers in demographics is age 46, which is the peak spending age of the average household in this country and in most developed countries around the world.

Harry said that he knows all types of events about people via demographics from cradle-to-grave, such as when people spend money, earn money, and save money.

He said that if you don’t understand demographics, then you don’t understand why the world slowed in the 1970’s, and in the 1930’s, and now.

According to Harry, this happens every 39-40 years, right on schedule, and yet most people are completely caught by surprise.

(Kung Fu Girl Note: again on demographics…I think they are interesting and certainly a part of the picture, but not the whole picture, and you always need to be careful when making massive generalizations about large groups of people. Then again, maybe I just find too often that I am the “weird exception to the rule”, LOL!)   🙂

Debt

He then moved on to talk about debt, and because his company is consumer-focused, they look mainly at private debt (not government debt).

Harry said that most countries around the world have 3-4 times as much private debt as public debt. He pointed out that our 2008 crisis was not a sovereign debt crisis; it was a private debt crisis, and said that he would show us many reasons why the end game is deflation.

He said that he knows that the government is inflating (they are creating money and new debt…new currency units) but that the private sector is deflating, and he said that the private sector is much bigger than the public sector. (He claimed that 80% of our GDP is attributable to the private sector and that private debt is $42 trillion vs. our public debt of $14 trillion)

(Kung Fu Girl note: according to the US Debt Clock, U.S. government debt is $15.7 trillion, and that does not include unfunded government liabilities, which add another $118.9 trillion)

Harry says the private sector is deleveraging, just like “every other debt-bubble in history”, although he said that this is an unprecedented time because we have never seen governments with both the tools and the determination to fight deflation.

He said that Bernanke, like most economists, has never had a “real” job—he’s studied the Great Depression, he’s studied deflation, and he knows deflation is nasty.

Harry explained deflation using a sushi example—e.g. what would your body do if you had eaten bad sushi? It would flush it out as quickly as possible, and this is what our system is doing with our bad debt.

Harry said this is what we did in the 1930’s…we went from almost 200% debt-to-GDP to 50% debt-to-GDP in only 3 years!

He asked us if we wanted to keep $42 trillion in bull***t debt, and said that’s what the government is recommending.

Japan

He then turned to Japan, asking how they are doing now 20 years after their crash. (Obviously quite bad, unfortunately).

Their stock market is still down 75%, and he pointed out that Japan doesn’t have an inflation problem though they have been stimulating and easing for years now.

Housing

Harry was told for decades that real estate couldn’t go down, whether in California, Miami, Vancouver, or Sydney, but housing is still dropping like a rock, and cannot seem to bounce despite the lowest interest rates in history and the strongest stimulus programs in history.

The Fed is fighting deflation purposely, because deflation is the trend, and governments can of course fight the trend, but what Harry does is he looks at the fundamentals and at what governments are doing and then decides whether the governments are going to fail or not.

He says that these stimulus plans will fail because according to Harry, 92 million baby boomers want to save, not spend.

(Obviously he hasn’t met Kung Fu Grandma, LOL!)   🙂

He said “old people don’t buy houses” and showed us a chart on the “Future Demographics of Real Estate”:

  • Top of real estate boom (age 50): The typical upper-middle class family is in a 4000 sf. McMansion
  • 10 years later (age 60): They downsize into a 2000 sf. townhouse (the kids are gone and don’t visit)
  • 10 years after that (age 70): 200 sf. nursing home
  • 10 years after that (age 80): 20 sf. casket

Harry pointed to the chart and said that is the future of real estate and is why after 21 years, real estate still hasn’t recovered in Japan.

He said that it’s not enough that Japan hasn’t had babies for decades and that they don’t like immigration and have committed “kamikaze demographic suicide.”

He mentioned reading a study recently where 35 – 40% of young people in Japan, male and female, are not interested in sex, and that they have given up because the economy is too hard and they simply have no time for sex or marriage.

He closed this section by saying, “So for anyone who thinks Japan is going to turn around… Demographics is destiny.”

More Demographics

Harry believes that people do predictable things as they age, and because of this “demographic effect” he can predict trends decades (not years) in advance.

He said the long-term is easy (all the volatility happens in the short-term), and if you ask any scientist they can tell you for certain that in 80,000 years we are going to have another ice age, and that in 5 billion years the sun will burn out!

He then showed us his 46-year leading indicator, which he uses to predict the peak in spending of the average household against the stock market.

He said that the baby boom birth index started to rise in 1937, and it was 1961 before it fell.

  • If you add 46 to 1937 you get a boom that starts in 1983, and
  • If you add 46 to 1961 you get a boom that ends in 2007

Harry says that demographics matter more than ever because we’ve never seen a generation this large all around the world (the baby boom generation).

In fact, the only country that didn’t have a baby boom after WWI was Japan, which is why Harry believes they slowed down first.

He argued that Japan had an enormous stock bubble that burst and a housing bubble even larger than ours that burst, and their government wasn’t able to stop it, so why on earth do we think that our government can stop ours?

And Japan came into their crisis with huge budget and trade surpluses and savings rates of 18%, but we came into ours bankrupt, so we are in for an even worse time than Japan.

Harry said that contrary to popular belief the echo-boom generation is not bigger than the baby boom generation. They are the first generation in history that was not born in higher numbers than the generation before, even when you count immigration.

Harry believes that we will see another boom around 2020 – 2023, but that it will not be like the boom from 1983 – 2007, because all western countries around the world are slowing, some faster than others.

China

Harry says that China’s workforce starts to shrink in 2015 and shrinks as far as the eye can see.

Harry believes Gordon Chang is right and that China will see the biggest crash in history quite soon and then will grow somewhere along the lines of 3 – 4% after that.

More Demographics

He then launched into some more demographic generalizations…

  • “Old people don’t spend money, they bribe the grandkids and go on cruises”
  • “Soccer mom cars have 20,000 miles on them vs. old people cars with only 4000 miles”
  • “Young people cost everything and produce nothing—that is inflation in people terms”
  • “Why did we have high inflation in the 70’s? Because baby boomers were in school, drunk, spending their parents’ money…that was the lowest productivity decade in the last century!”

(KFG Note: I’m not trying to slam him—those were his words, you can get the audio from the great folks in the Casey organization and give a listen yourself…)   🙂

He then explained the last few decades according to demographics.

He explained the 1970’s:

“We had worsening recession, the old Bob Hope generation was over their spending cycle and baby boomers were entering the economy en masse at great expense…it cost a lot of money to raise young people and incorporate them into the workforce.”

And then the ‘80’s:

“Stagflation…suddenly in the early 80’s the economy started growing like crazy and inflation fell”—which Harry attributed to the baby boomers transitioning from being “expensive rebellious young people, hippies”, to “highly productive young new families, yuppies” (He made another joke about “cocaine to rogaine”)

(KFG Note: Again, that is interesting, and certainly a part of what happened I’m sure, but he completely ignored the fact that a lot more was happening then, like going off the gold standard, the Vietnam War, and much more…)

The Inflationary Effect of Young People

He then put up a chart showing Labor Force Growth with a 2 ½ year lag, which he finds highly correlated to young people moving into the workforce and old people moving out and retiring.

He said young people moving into the workforce is inflationary, and old people moving out of the workforce is deflationary.

He admitted that inflation is a complex topic affected by currency swings, economic swings, food, oil prices, etc., but he instructed us to “look at the correlation with none of that included!”

I wish I could show you the chart—it did look quite correlated (however, even I remember from science class way back when that correlation does not equal cause).

He asked us “how did I find this indicator?” and then said…

“By accident!” and said that is the way any entrepreneur does but will never admit.

(I am not kidding—he honestly said that!)

He said that he saw workforce growth on one side and inflation on the other side and simply put them together with about a 20-year lag, because that is when people enter the workforce.

And then once these young people enter the workforce, businesses have to invest in them, providing offices, technology, equipment, and training, but then about 2 ½ years later these young people start producing more than they consume. (Hence the 2 ½ year lag on his chart).

So, he said that once the baby boomers arrived in the workforce in the late 70’s, we had the greatest boom in history as they grew up and had children and bought houses and got married and worked and increased their incomes.

(KFG Note: no argument from me—the baby boomers are a force to be reckoned with!)

He said there is a huge difference between a 46-year-old and a 19-year-old and asked us if we would rather have an economy full of 46-year-olds or 19-year-olds, and said that inflation is highest in emerging countries because they have more young people than old people.

In the 1970’s, young people dominated our economy. Harry believes that he can project this out roughly two decades in advance and predict the number of 20-year-olds that will enter the workforce and the number of 63-year-olds that will retire.

These numbers have held up for decades and he thinks they will stretch out further, because the baby boomers have realized that they can’t retire because they don’t have the money (he said that their house didn’t keep going up at 15% per year, which was their retirement plan).

The Slowing of Our Workforce

He said that the baby boomers are a spoiled generation. (Sorry all of my Kung Fu Aunties and Uncles, LOL!)

He said the boomers grew up in the happy days of the 1950’s and 1960’s and the only difficult economy they saw was the 1970’s (and then they were “drunk in college and didn’t really notice”.)

This indicator told Harry that baby boomers would be retiring from the workforce faster than young people would be entering, and that therefore workforce growth would slow. Workforce growth was:

  • 1970’s – 4%
  • 1980’s – 3%
  • 1990’s – 2%
  • 2000’s – 1%

And now Harry says it will be zero and yet Mitt Romney thinks he is going to create 11 million jobs…Harry says not a chance!

He went on to say that Bill Clinton did not cause the boom in the 90’s, and that Harry predicted the balanced budget in 1992 by demographics.

He believes that oil will go down in price, like Porter, and launched into a discussion of commodity cycles.

Commodity Cycles

Harry has studied commodity cycles in history (KFG Note: So have I, and Mike Maloney is a huge student of these) and that every 29 – 30 years they peak like a clock.

(He said: 1920, 1949-1951 double-peak, 1980, and 2008-2011 another double-peak).

Harry said that his company sees commodity prices going down, like Gordon Chang, because China is going to slow down after their massive bubble bursts and that China alone is consuming 50% of the industrial metals.

Speaking of China…

He said that their slowing economy is deflationary, but that the deleveraging of debt is really deflationary!

Fundamentally, babies are the key to the future, and China is a very large, fast-growing country (at least it was up until recently…) that has not been having babies for decades.

Harry says that China is the first emerging country that is going to age before it gets rich, and that the Chinese people are not as rich as we think they are.

He said that we see all of their brightest and smartest people come over to the U.S., but that their per capita GDP is 8,000 vs. 50,000 for the U.S.

With four times the people they are still only 35% the size of our economy…and Harry went as far as to guarantee that they will not overtake our economy by 2020.

But he did say that China will still grow from urbanization, and he believes that the emerging world is where all of the demographic growth is in the future.

And now, finally, onto sex!

Harry believes that the birth index (adjusted for immigration) is the leading indicator for all types of things:

  • Inflation…a 20-year lag
  • Birth…the average parent has their first child at age 28
  • First house…age 31
  • Upgraded house…age 37 – 42
  • Travel…age 50 is the peak
  • Invest the most…age 54
  • Highest net worth…age 64
  • Retire…age 63
  • Camping equipment…age 39
  • Life insurance…age 58
  • etc.

People take on the most debt when they buy their biggest house, age 37 to 42, and mortgage debt peaks at age 41 and declines the rest of their life. Right now, the Fed is trying to get people to borrow more money and buy more houses but Harry says that is just not going to happen.

This all depends on the birth index, so Harry says,

“If you want to understand the economy on a deeper level than any economist ever has, including today, just understand what has to happen before people are born…somebody needs to have sex. So it is actually sex that drives our economy.” — Harry Dent

(He then joked that if economists ever actually had sex they would probably understand more about it!)   🙂

Sex + 9 months = baby + 46 = peak impact on the economy.

———————————————

I am going to stop there because this is so. very. long! (Typically my articles are about 800 – 1000 words, but Harry packed a lot in, and believe it or not this was only about half of his talk!).

In the future I can just summarize and hit the key points for you, but since I’m such a nerdy notetaker I thought you might appreciate more of the blow-by-blow so you can draw your own conclusions (but he was really long-winded!).

So I am dying to hear…what do you think about Harry Dent and his use of demographics to predict the future?  Please let me know in the comments…I would love to hear your thoughts!

Thanks so much for reading (especially today’s massive missive!) and for being a part of our Kung Fu Finance community!

To your financial success,

—Kung Fu Girl