Economist and cycle trend forecaster Harry Dent sees crushing deflation ahead for nearly every financial asset class. We are at the nexus of a concurrent series of downtrends in the four most important predictive trends he tracks.
Laying out the thesis of his new book The Sale Of A Lifetime, Dent sees punishing losses ahead for investors who do not position themselves for safety beforehand. On the positive side, he predicts those that do will have a once-in-a-generation opportunity to buy assets at incredible bargain prices once the carnage ends (and yes, for those of you wondering, he also addresses his outlook for gold):
All four of the cycles I track point down now. One after the next has peaked in the last several years. All four point down into early 2020 or so. That's only happened in the early to mid-'70s when we had the worst stock crashes back then, the OPEC embargo, etc — the worst set of crises since the 1930s.
Of course, in the early '30s we had this same configuration of all four of these fundamental cycles, cycles that have taken me 30 years to hone and say "these are the four that matter".
The next three years are likely to be the worst we see in our lifetimes. It will be more like the early 1930s when stocks hit a debt bubble and financial asset bubbles crashed, which they only do once in a lifetime such as the early 1930s. Stocks will be down 70, 80, 90% — that's to be as expected in this stage of the cycle after such a bubble.
I went from being the most bullish economist in the '80s and '90s to now being of the most bearish because what goes up goes down. That's what cycles do. At heart, I'm a cycle guy. Demographics just happens to be the most important cycle in this modern era since the middle class only formed recently — its only been since World War 2 that the everyday person mattered so much; because now they have $50,000-$60,000 in income and can buy homes over 30 years and borrow a lot of money. This was not the case before the Great Depression and World War 2.
And based on demographics, we predicted that the U.S. Baby Boom wouldn't peak until 2007, and then our economy will weaken — as both did in 2008. We've lived off of QE every since
That's a brief summary of my fundamentals and of why I tell people this is not the time to believe in the Trump rally. I'll go into that. I'll show you why that cannot last and he cannot create 4% in growth.
Then we also go into which areas will have been favored by demographics and by our cycles. You'll never see prices this low if you protect your capital now and convert it to cash or to safe, long-term high quality bonds, then you can take advantage of the sale of a lifetime. If you don't, you'll have seen your financial assets wiped out a good bit more than they were in 2008 and '09, and the markets won't come roaring back to new highs next time.
Click the play button below to listen to Chris' interview with Harry Dent (44m:31s).
Chris Martenson: Welcome to this Peak Prosperity Podcast. It is January 26th of 2017, and I am your host, Chris Martenson. Now, as I record this, the U.S. stock markets are hitting new all-time highs. The Dow has just cracked the 20,000 mark, and the world's equity markets have powered to new 17-month highs while looking at all time highs as well. The narrative is that this has something to do with Trump, although I cannot find anybody who can explain to me why Europe's markets should be anything but threatened by the trade stances of Trump.
Regardless, that's the narrative as used to explain all of these seemingly unstoppable stock market advances. However, as you already well know, the explanations put forth in the media to explain things are nearly always inaccurate, just plain misleading sometimes, or just wrong. My own favorite is that the stock markets are no long divination machines capable of discounting the future, but merely gauges of liquidity, telling us that the world's central banks have overdone it again, and poured too much fuel into the furnace.
Now, to really understand the probable future, you have to have been rooted in the fundamental always, always, always. I know that fundamentals are out of favor right now, but trust me, they will come, roaring, back. They always do. Today I'm very excited to have with us one of the world's great economists. Yes. Some do exist, and a master of the fundamentals, Harry Dent. Harry is the author of The Sale of a Lifetime and editor of the free newsletter "Economy and Markets," which can be found at HarryDent.com.
Mr. Dent has correctly called nearly every major economic trend over the past 30 years, including: the 1991 recession, Japan's lost decade, the 2001 tech crash, the bull market and boom in housing of the last decade, and most recently the bubbles in credit and in housing. Now he's said that U.S. equities will "crash to a degree we haven't seen since the Great Depression."
He has recently predicted a drop in the Dow to 6,000, and "when the dust settles it'll eventually plummet to 3,300. Along the way it will see another real-estate collapse. Gold will sink to 750 an ounce, and unemployment will skyrocket. It's, going, to get ugly."
Certainly provocative views that I know we are all excited to explore with Mr. Dent. Harry, welcome to the program.
Harry Dent: Well, nice to be here, Chris.
Chris Martenson: Well, thanks now, Harry. Before we dive into current events and your predictions, I would love for you tell our listeners about your methodology, so they understand the basis for your views and predictions. What's your framework?
Harry Dent: Well, you know first what I do, Chris, I don't study government policies, because governments react to what the real economy does, and the real economy, 80 percent of it to be exact, is driven by consumers and business, and that's mostly through consumer spending. I look at the predictable things that people do as they age, and I look at things that impact consumer spending and business growth; everything from the aging of the population. People spend more money in their mid to late forties. They get more productive as workers.
I look at technology cycles and when technologies come together most favorably for business and productivity of workers. These things are crystal clear things, and they're very easy to forecast. What I tell people, against what economist say, the long-term is easy to forecast and to see. It's the short term that can be incredibly difficult, because more and more cycles come in as you get to more of short term; more and more political factors.
I mean just imagine how hard it would have been -- And even the smartest money I tracked didn't get this one -- to predict that Donald Trump, number one, would have won against clear polls that said that Hillary had it in the bag, 80 percent chance of winning. Then if he had won by surprise it would have gone against all of the pundits, saying oh, my gosh he'll create so much uncertainty that the markets will crash or go down. The opposite happened.
That's how difficult the short term can be to predict. But, the long-term? Yes, I could see that Japan's baby boom generation peaked decades ahead of the rest of the world because the births there peaked just before and after World War 2. Japan was set to crash in the nineties when the rest of the world's baby boomers were in their strongest stages in spending in the United States and Europe and other countries.
We could see that housing was gonna peak ahead of the economy, because spend on housing peaks ahead of peak spending. So the most important indicators I have I got in the eighties. The first one was the spending wave. It's simply a 46-year lag on the birth index, which I adjust for immigrants, legal and illegal that are here today and when they were born on average. Forty Six is the age when the average family spends the most money in their lives.
We get yearly updates from the government and the Consumer Expenditure Survey on not only total spending and by age, but from cradle to nursing-home. I can tell you when potato chips peak. That's at age 42. When cruise-ship travel peaks. That's at age 70. Nursing-homes are gonna be the hottest things for the next three decades we've ever seen, because the Baby Boomers are just about to start to enter that last thing that peaks at age 84, and largely for women.
We look at demographics, but I also look at geopolitical cycles. By the way the demographics, which we predicted way back in the late eighties when Japan had declined. When we predicted that, we said hey, the U.S. Baby Boom won't peak until 2007, and then our economy will weaken as it did on that 46-year lag in 2008. We've lived off of QE every since. There was a cycle that I had to kind of come up with, because the second boom and bubble from 2002 to 2007, which we predicted, but I thought it would have been much stronger, as was the first bubble from '95 to 2000.
I had to go back and dig. I found out why. I found a geopolitical cycle that's positive. Every 17 to 18 years "Kum Ba Yah" in the world and then it's negative. Well, that cycle hit in 2001 for obvious reasons, 9/11 and was terrible ever since. That cycle doesn't bottom until around 2020. Then things get more favorable again. I've also tracked a technologic cycle. You just look back. I mean this is one of the most clocklike. Every 45 years.
You know the steam engine came and then peaked in it's impact and factories, and then steamships peaked in 1875, and then railroads peaked in 1920, and automobiles saturation and super highways in 1965, and now recently the internet. We all have the internet. We all have Google email, broadband, and all of these things and Smartphones and stuff. Now, innovation is down to social media. To me Facebook is great, but it's entertainment. It's in the dancing of cats and dogs. It won't triple the productivity of my research business as Google and email did.
Then finally there's a roughly boom/bust cycle, which I have a secret way of forecasting, of which nobody's aware. Here's the point, Chris. All four of these cycles point down now. One after the next has peaked in the last several years. All four point down into early 2020 or so. That's only happened in the early to mid seventies when we had the worst stock crashes back then and OPEC. You know cartels and all of this stuff, the worst crisis since the nineteen thirties.
Of course, in the early thirties we had this same configuration of all four of these fundamental cycles that have taken me 30 years to hone and say these are the four that matter. Another problem with economists, Chris, is very simple. They look at so many indicators and short-term stuff that they can't see the forest for the trees. That's why they miss these long-terms trends that are so predictable.
The next three years are likely to be the worst we see in our lifetimes. It will be more like the early nineteen thirties when stocks hit this sort of debt bubble and financial asset bubbles crash, which they only do once in a lifetime like the early nineteen thirties. Stocks'll be down 70, 80, 90 percent that is to be as expected in this stage of the cycle after such a bubble.
I went from, as the most bullish economist in the eighties and nineties to now, as one of the most bearish, because what goes up goes down. That's what cycles do. At heart I'm a cycle guy and demographics just happens to be the most important cycle in this modern era since, and only since we've had a middle class form, and only really since World War 2 has the everyday person mattered so much because they have $50,000, $60,000 in income and can buy homes over 30 years and borrow a lot of money.
This was not the case before the Great Depression and World War 2. That's a brief summary of my fundamentals and of why I am telling people this is not the time to believe in this Trump rally. I'll go into that. I'll show you why that cannot last and he cannot create four percent in growth. People should have gotten, as really safe especially for the next three years. Now after that and the point of this new book The Sale of a Lifetime, there will be one opportunity after next to buy stocks or emerging market stocks or commodities or gold or real estate.
Then we also go into which areas will have been favored by demographics and by our cycles. You'll never see prices this low if you protect your capital now and convert it to cash or to safe, long-term high quality bonds, then you can take advantage of the sale of a lifetime. If you don't, you'll have seen your financial assets wiped out a good bit more than they were in 2008 and '09, and the markets won't have come, roaring back to new highs next time.
Chris Martenson: Now, Harry. What a provocative and very much information of interest. Let me start here then with this then because I think we can build off of this nicely. A very open question for myself, my listeners, all over the world as well obviously is will this be through inflation or is this through deflation. You've talked deflation. That's what I've heard and a fall in these financial assets prices.
Why not have somebody such as John Hussman or Grant Williams or other astute Fed observers, Axel Merk, people like that who know the Fed and the central banks well. They've committed some of the most egregious of policy blunders every, because they've tried to do things such as prevent the very cycles about which you've talked; at least the business cycles and asset cycles.
They want to see if they can smooth those out, prevent them from, going bust. All of that. At this point when we try to resolve the inflation versus deflation question, there are some who say that when this next sort of deflationary wave comes, they know what to do. They'll just keep printing. You've said they'll lose that battle. Do I have that right?
Harry Dent: Yes. I'll tell you why. They've already printed $13 trillion global, and of course Japan are still, going, at rapid rates especially Japan. Guess what we've gotten out of that? Zero to one to two percent at best inflation in all of the developed countries that have printed all this money. It's because this money is being printed to stop and tame deflation. Deflation means that debt deleverage, banks fail, business fail, prices go down. That squeezes margins. That's what happened in the Great Depression. Deflation is a ball of wrecking.
Now, the biggest problem here as you've said these other experts had correctly said, this is terrible policy to try to smooth out these cycles in the economy. The economy grows through the dynamics of opposite. Free market capitalism is the opposite of democracy, just as men and women are opposites and positive and negative poles on a battery. That's how you create energy and dynamic growth. Inflation and deflation are part of this cycles. Booms and busts are a part of these cycles.
In the bust and inflationary and deflationary times are when we get the greatest innovations that then move mainstream with the next demographic boom. This dynamic is necessary and by the stopping of this dynamic and just to create a comatose economy where Japan's grown at zero percent now for 26 years. The U.S. has been growing at two percent now for eight years. That won't even last with demographics while getting worse. You just basically freeze innovation. You kill the golden goose, I call it.
This is terrible policy. They are just fighting such persistent and long-term downward demographic and even technological innovation trends and all of this sort of stuff. Here's what happens in an economy for the first time in history where you have the Baby Boom Generations in most as developed countries than the Millennial Generation to follow them. As we move forward, you get to the point where there are more Baby Boomers to retire than Millennials to enter the workforce.
Ugh! The workforce has not grown, which it hasn't. It's at negative for the next several years. Then it's at just above barely positive for decades to come. How do you grow four percent with that? Productivity has gone down ever since the baby boomers started to retire in the very late nineteen nineties. It went from 67 percent to now 62.5 percent. By the time they've fully retired by 2024, it'll be at 58 percent by a projection. We'll lose another 4.5 million of our workforce.
How do you grow at four percent with a workforce in decline for decades to come? How do you grow at near zero productivity? We're at the lowest productivity rates since the Bob Hope generation was retiring en mass in the early eighties the down of their cycle. It set to get worse. This Trump thing, if he just shifts around the pie and shifts taxes from the government to consumer and business and cut off some regulations and things like that build some infrastructure, this will not happen! You will not have created four percent in growth. It's demographically impossible.
Japan has stimulated much longer than us at three times of quantitative easing in the last several years. They still long term grow at zero with zero inflation and zero productivity. They would have had deflation and bank failures had they not printed so much money.
The money, as printed by a being, is to keep the banks from falling over like in the Great Depression. The price of that you go into a coma economy such as Japan. You never go to what I call the winter, deleveraging deflationary season of deleveraging back to the next spring with mild inflation, boom, as we did while going from the thirties, forties, fifties, and sixties.
This is horrible policy. If we'd have let this crisis have happened and have let some banks fail and some companies fail and had gone through this, we'd have been over the worst by now. The Great Depression, the worst of it was over in three years. Then we did nothing but grow for decades after that because we had lifted a lot of debt off of consumers and businesses.
When banks fail, it's because they have bad loans. They have to write them down or write them off. That's why the go under. Then the stronger banks take over their assets and you reorganize the system of banking, but you come out of it with far less debt. Japan now has more debt than ever. We have more debt than ever, and our government deficit, which is the smallest part of our debt, private debt is much larger, has doubled every eight years. Has anybody noticed this? Five to ten trillion under Bush, ten to twenty under Obama.
It'll be 20 to 40 over the next two administration, and I don’t think it'll have been with Donald Trump. I said when he got elected I will not be as surprised if he doesn’t last the first year either because he does something so stupid that he kind of gets pushed out or impeached or he gets shot. If anybody's to get shot, people who shake up things, and he's shaken up things more than anybody in history, at the most rapid rate-- People who shake up things such as Reagan, such as Kennedy, like Lincoln, often get shot.
Chris Martenson: Well now, we can the feel the pressure building, right. You said we got nothing for all of our QE. It's not quite right.
Harry Dent: No. We got two percent growth. We wouldn't have had it, and when we did stop the system of banking collapsed in like the thirties. Two thousand and eight looked just as 1930 did. No. I get Republicans that say all the time to me, Chris. Oh, Harry, this quantitative easing did nothing. Oh, no. It did a lot. The problem is there's a big price for it. It kills the whole free-market system and kills free markets in general. The central banks have taken over the bond markets and pushed down long-term risk-free rates in everything else, real estate, bonds, stocks, are heavily impacted by these sub-zero rates.
Chris Martenson: Not just impacted. I'll give you the other thing that my heading was towards, is that it also gave us the largest of wealth gaps in all of history. Last year 62 people had as much wealth as half of the world. This year that number is eight. This breeds a sort of social injustice. Listen. We're primates. We're humans. We hate unfairness. This is deeply unfair that the central banks are printing out of thin air, and it's really preferentially showed up in a very small set of pocketbooks.
That's not really good for the social experiments. We have a lot of tensions around all of this. Let's talk about what it hasn't done. It hasn't led to a real resurgence in corporate R&D and the next wave of investments that'll do great things for growth or a future economy or productivity. We have financial engineering. We have speculation. We have prop trading. Listen, Rome went down this path. You debase your currency. You just print it out of thin air, or make your coins lesser and lesser actual metal content and people catch on. We're smart. We go “hey if that's the game, I'll do this. Why would I expend effort by trying to create real new as valued products and services.” It's a risky thing, and it's with hard work.
I'll just go over here into this highly speculative arena poll while knowing that the central bank has my back. They'll bail me out if I really screw up here and make bad decision, but that's just awful.
Harry Dent: Right. Well, why not use flip homes and speculate in tech stocks. Exactly. It's a something economy. It's artificial. It's grown for the wrong reasons. People keep with saying oh, well, the Fed will hit massive inflation at some point. No. They won't. The problem with the Fed's policy, what will have killed them and defeated this is that all they've done was to create even greater bubbles in debt and in financial assets, real estate and stocks and everything than we had in 2007. They'll burst again. Bubbles only burst.
The don't even need something big to happen. Real estate started going down before the economy went down, before the subprime got nasty because it got to expensive and baby boomers had run out of their cycle of home buying. Bubbles always burst. That's the danger here. What gonna trigger this next bubble? I mean a crisis in banking already brews big time, worse than Greece in Southern Europe and Italy. Germany has worse demographic than the Japanese had when going into the nineteen nineties and the decade ahead. Everybody thinks that Germany is the strongest country in Europe that'll have held it together, meanwhile Deutsche Bank has gone down like a flaming plane already.
China has bubbles in real estate that are so extreme they'll have to burst in the next few years. When that happens you'll have triggered a tsunami around the world in real-estate crashes. This thing will not last much longer, and then bubble will burst, and that's the price we'll have paid for this free-money, something-for-nothing economy where, like you say, the rich get extremely richer. This does favor, and it's not the top 1 percent I look at. It's the top 0.1 percent that run away.
They have as much wealth as the rest of the one percent put together. These are the people who make the most money off of free money, because they can leverage and they have the money to invest in these financial assets. They're the ones that benefit, while Homer Simpson has very little in the markets and only their home. Of course, that home got killed in the last great recession and it'll get killed worse again.
You're right. This is about income inequality off the charts. It's exactly how the economy looked in 1929 before the Great Depression not just the peak of a generation's spending, not just a debt bubble, not just financial asset bubbles, but we had the same 1 percent of people in control of 50 percent of the wealth, just like we have now. It's gotten even worse.
This is unsustainable period. When it crashes it'll be worse than ever. All they've done is to create a bigger bubble. We've added $57 trillion more in debt around the world t the $150 trillion we had at the top of the last bubble and most of this in the emergent world, which is the least stable and has gotten crushed by the crash in commodity prices. I mean, we have the worst downturn. I'm convinced over the next three year, the worst financial crisis and bubble burst of our lifetimes.
We will not see something this bad again, so hey. Stocks are way overvalued. You've got this very irrational rational Trump rally, which I call the final blow-off phase. I don't think it lasts past July, but I do think it goes higher. I think we'll see stocks at least ten percent higher from here before the economy figures out that we can't grow at four percent no matter what this crazy person does. He is a crazy person. He may be smart in a lot of ways, but he is crazy. Any psychologist would have marked him off on a few things right away.
When it bursts people will be surprised, and one of the things about which I've warned people the most, Chris, yeah, people say well, gosh I don't want to get out of this bubble. Yeah. Maybe it's a bubble, but it keeps with going up. Here's the problem with bubbles. They'll go down typically 80 percent, 70 to 90 and especially in stocks or commodities, but half of that crash and most of the bubbles in history have come in the first two to three months when the markets finally get it, and the smart money runs like crazy, and the dumb money and most people end up with the holding of stocks that go down by 40 to 45 percent in two to three months.
This happened in the '29 crash. It happened in the Nikkei crash in 1990. It happened in the tech wreck in early 2000, and it happened just last year. You can see this just last year. China's second stock bubble burst by 45 percent in the first three months in late 2015. You had everyday households who lost everything. They had gotten money on margin and stuff. The government stupidly encouraged this to try to offset their real-estate slow down. Then people just got wiped out.
That's the danger. If you hold out-- Right now I think this Trump rally has enough behind it that people are probably okay into the summer, but I'll tell you if we see this market keep with going up into the summer, and we start to approach that classis crash season from late July to late October, I'll tell people you've got to get out. You've just got to be safe. If you miss another five percent then hey, you could've gotten slammed by 40 percent in three months, so better to do that.
Chris Martenson: Now, at the heart of all of this, of course, you've got these big trends. You named these four big trends, and they have a very good both explanatory and predictive power and it make sense, right. We can say well, what is an economy? Well, it's about people when buying and consuming stuff. Maybe we should have tracked the people. I get it. What you talked about though is with the federal debt in the United States, the doubling every eight years. Using my handy-dandy rule of 72, that's a nine-percent-compounded annual rate of growth.
Harry Dent: Yeah. That's versus GDP that's grown anywhere between 2 percent recently and 3, 3.5 percent at that. That's one statistic we quote. From 1993 to 2008 in the baby boom, debt grew at 2.6 times the rate of GDP. Any economist that does not see that, as turning into a debt crisis down the road should not have been an economist, and should be barred from practicing.
Chris Martenson: I agree.
Harry Dent: Most economist say oh, this is okay. It's not okay.
Chris Martenson: It's not. The canard I have to bat around all the time is somebody'll say well, so let's say Japan. It's the ultimate Petri dish for this. Why that country hasn't gone down in flames, I don't understand because the total amount of debt that they carry right now per household is about million dollars per household, right. It's just off the chart. I've looked at the total debt of the country. People say oh, but Chris they owe it to themselves. What do you say to that one, Harry?
Harry Dent: Well, first of all, the greatest amount of debt in our economy all economies, developed world is private debt, three times typically government debt, as much as four time in the boom. That is owed to the banks and people like that, and they go under, or you go under when you can't pay it, or you lose your house, or you buy stocks on margin, and you lose everything. It's not true. Governments owe it to themselves.
Okay, but a lot of this debt was supposed to be used to pay us social security and healthcare, which is underfunded by get this about $70 trillion, just like a lot of pension plans have to report the amount of pensions or healthcare benefits they've promised their workers that has not been funded in a conservative investment plan to meet those. The government's $70 trillion unfunded.
They get in a debt crisis or they can't grow their debt further because nobody wants to buy their bonds anymore because their debt ratios are high. How will they pay our benefits. They can't pay them despite the debt crisis, but that only makes it worse. It's absurd to say oh, we owe it to ourselves. Studies show that when government debts gets above 90 to 100 percent, it starts to slow the growth of GDP. It's a burden on the economy.
It's the same thing. When household debt you know gets to 100 percent or more of GDP, it slows their spending because they pay more and more interest and the government pays more and more interest. Right now, as we talked about earlier by suppressing, I mean by artificially pushing their bond rates down to zero short term and more like two percent long term instead of the typical five to six percent inflation rates and such, they’re cheating.
They can handle this debt-burden short term because they buy their own bonds and push rates down. Well, that's cheating, and that won't last. In the long terms we'll go back to treasury bonds at more like five to six percent. Then Japan would be bankrupt overnight. Their entire budget would be for interest if we just went back to the normal three percent inflation and five to six percent long-term bond rates. They'd be bankrupt overnight and interest would have started to consume a huge portion of our government budget.
No this is not maintainable. It's just another ridiculous bubble talk. When you get in bubbles, I'll tell you why. People are stupid. That's what this books is about, Chris. People never see bubbles because they don't want to. They're in denial. They've gotten something for nothing. There house has gone up by 15 percent a year instead of the normal 3 percent a year with inflation. Stocks have gone up by 20 percent or higher a year instead of the normal seven percent or something like that. Their mortgage costs them four percent instead of six to seven percent. My cars loans, leases are at two percent now. They used to be at six percent.
We're getting a free lunch. People love that. It makes them feel good. It make them feel high. When somebody like me says hey, sorry folks, we're in a debt bubble, we're in a financial asset bubble, and everyone of these that looked like in history has busted, and has busted horribly when it did, and people got wiped out. People want to shoot me. They want to shoot the messenger. They don't want to hear it. CNBC hates me. Some people in Fox Business like me because they understand that debt is not good like this, but most people just don't want to hear it.
Chris Martenson: Let's section the people out a little bit. There is an article that's really interesting that just came out in the most recent issue of the New Yorker where the very wealthy to include tech mobiles who have really made it like the start up founder, cofounder of Reddit, but as well as many hedge fund managers, private equity people. They're very wealthy people. They've obviously got access to some very good information, and they buy bunkers in New Zealand.
Here's the thing I run into Harry, is at the retail level like the average person on the street it's very hard to communicate some of this stuff too, definitely a shooting of the messenger, and people who really don't want to believe otherwise. But the people who are the most worried right now are the people who have the most experience in the financial markets.
I mean, I talk with guys and gals with decades of experience, running of hedge funds for 30 years. They look at all of this, and they say this is a mess.
It worries them because they worry that when this next turn comes, it won't be as your grandpa's turn where humans in little red, orange, and blue coats start to trade people and things get a little out of hand. These are with computers making decision at light speed while operating in microseconds to say that we're out of this market potentially.
They worry about these flash crashes that we've seen in small market to somehow perpetuating across the larger market structure, that is that I think we've had an SEC asleep at the wheel. I believe that our news guys Sal Arnick [PH] and the other guys, them as training. These are broken markets in many respects because we don't really have the same structure of governance on them that we did. It's a little bit worrisome. Maybe you've seen this as well.
When you see something like the dollar or the pound or U.S. treasuries move by whole percentage points in a matter of minutes, you know six, seven, eight, nine sigma moves should happen only, as happened, once every ten million to a billion year kind of stuff, it just speaks to me that this is a reason to be on edge. The edgiest people. The edgiest people I know are the ones who were the most sophisticated in these markets. I don't know that most people have really connected those dots as of yet.
Harry Dent: Yeah. That's what I call the smart money. That's what I track. I look at the commitment of traders. A small percentage of traders who are the commercial hedgers always tend to be on the right side of the market. At a major top, they've hedged as bearish, and on major bottom they've hedged bullish. These people are the people who understand this and are saying oh, my God. This thing has to go down. They're the people who understand that the higher a market goes the more vulnerable it is.
For most investors the longer they see real estate or stocks go up, the more confident they get that they won't fall. That's a total misunderstanding of history and investing. You're right. Only a small percentage of people get this, and these are the people I talk to. I just won't be as a mainstream forecaster at this point because everybody hopes this works out. Everybody as much as people know Trump has the impulse control of a grease fire, he's kind of crazy person. They're like well, we hope he does some stuff and takes us back to four percent. They hope.
Anybody that looks at the fundamentals, anybody that looks at cycles, debt cycles, financial asset cycles, anybody that looks at bubbles, this book has so many chart to show that all of these bubbles look alike. They look like the male orgasm chart from Master's and Johnson's back in the last fifties. That's exactly how they are. They're as a financial orgasm. Orgasm can only go so far until they get too intense.
Then when they end, they end rapidly. That's what happens with bubbles. I go out of my way to say “look, everybody, politicians tell you there's not a bubble. Goldman Sachs has said it’s not a bubble. Economists are saying it’s not a bubble. CNBC says it's not a bubble. Don't listen to these people. This looks like a bubble, quacks like a bubble. This is a bubble and bubbles only do one thing. They don't have soft landings. They burst violently.” The typical stock bubble as I said earlier is at 80 percent. That's how much Japan's ultimately went down in the Great Depression. It was 89 percent for the U.S. stock market.
We were kind of as China is now, the most of leveraged to come. China probably will be at 90 percent. In the U.S. it'll probably be at 80 percent. That's not something through which you want to sit because after that bubble burst in the early thirties stocks to 24 years to get back to those 1929 highs. You'll be dead as a retiree if you listen to your stockbroker and say well, he'll say stocks always come back, and we have you, as diversified.
I also ask investors to look at your 2008 crash portfolio. How did diversification work for you there? When real estate went down, commodities went down with gold and silver included, every stock market in the world emergent markets, as developed markets, small caps, large caps, all went down. How did that diversification work for you? It didn't
Chris Martenson: Harry, I have to get to the heart of this, then. I'll assume that the safest of investments here in your view is cash. I guess not Japanese yen, either, but in U.S. dollars. Is that fair?
Harry Dent: Yeah. Cash in U.S. dollars because the U.S. dollars versus other currencies was that had really rallied when the 2008 meltdown happened. It went up by 27 percent in three or four months, not because we have good monetary policies. We're the best house in a bad neighborhood, demographically, and we have less quantitative easing, cumulative than Europe and way, way less than Japan. U.S. in dollars, but also the highest quality of bonds.
In the Great Depression for that entire decade where stocks and real estate and commodities and everything else were decimated, the long term treasury bonds and AAA corporate bonds, the highest quality of long-term bonds roughly doubled in value when you include their dividends, and they paid higher dividends. Now with the balance in yields pay as high or higher dividends that stocks, and I think these yields may bounce a little bit farther later this year.
So yeah. It’s the safest asset, highest quality bonds. You can bet on the U.S. dollar to go up at least in the early stage of the crisis UUPs an ATF that tracks that. The U.S. is at 100. It's 45 percent higher than when the great recession started in January of 2008, and it bottomed. I think it's to go to at least 120. The U.S. dollar or U.S. dollar index or dollar bullish funds, highest quality, U.S. Government and AAA corporate bonds and just good old cash. There's nothing wrong with having liquid cash that every time assets go down you can buy more of them and you've got the cash to do it, because don't think anybody will lend you money to buy stocks or real estate at the bottom of this next crisis. You have to have cash or high quality stuff.
You can sell these bonds any day. These bonds could get not only to 3.5 percent yields on something safe, they appreciate when deflation brings those yields back down. The bonds appreciated from 1931 to 1941, a ten-year bull market after stocks and everything crashed. The bonds are the one bubble that have gotten a setback, now, but the one bubble that will be the last to burst many years from now.
Chris Martenson: I agree with that. Now this brings me to my final question, which is really about gold. Gold and silver are two separate words to me. I don't lump them together. Gold is a monetary asset to me. That's probably why I like it. Here's the question. As we get into this deflationary aspect, which I agree with you feels as the end stage to all of this, I know longer trust the statements of any of the major commercial banks. I think there will be an enormous crisis in banking with that.
When you say cash, if that means cash in the bank, I think we have to understand which bank matters because not all were created as equal. Some of them carry derivatives that nobody understands at this point. Gold to me is, as potentially a means to have a monetary asset outside of a system, in which frankly I've lost of faith if not all of my trust especially with the bail-in provisions, and the sneaky war-on-cash stuff that were courtesy of Summers and Rogoff and all of those other cast of slimy characters and what not.
It feels to me that people have gotten herded into a system of banking that is just like the last corral you ever want to get caught in. When you say, 'cash' what do you mean by that, and second how does gold fit into that story?
Harry Dent: Okay, first of all, very good question. You have to have your cash or your safe bonds or your dollar index or whatever in a brokerage account whether it's in a bank or a brokerage firm. I like to be with online brokerage firms because, as banks that also lend money against real estate and can get crippled and stuff, they are not. But if you have it in the bank in a checking account [begs the question] they do lend that money out into these bubbles especially into real estate, and when they lose that money, you're money will not be there as it wasn't there in the early thirties.
If you're in a brokerage account, they can't lend against that, even if it's in a bank. I'd rather have it. I have my money with Schwab or somebody such as Scottrade because they're not in the business of lending or investment banking and all of this sort stuff. That's the first thing. The second thing, gold. Gold correlates with one thing long term, and one thing only, and that's inflation. Also short term. Gold is an inflation hedge. That's why it was such a great investment in what I call the summer season of high inflation or recession or stagflation. That's a part of my eighty year cycle that works like a clock.
It's not a deflation hedge. People don't get that gold was a bigger bubble than the stock market. Gold went up eight times in ten years between 2001 and 2011. We told people to get out of silver and gold when silver retested at is 1980, previous bubble high. We said this looks like a good time to get out. Gold went a little higher into September, but basically we told people to get out. Bubbles have to burst. These things follow the commodity cycle, which is a 30-year clock.
Gold did not provide that safe haven. I look back to late 2008 when things really melted down and it look as though we would go into a great depression. Major banks had failed, and general motors could have gone under and AIG and all of this sort of stuff. Gold went down by 33 percent. Silver went down by 50 percent. They did not protect you. I don't trust gold. For gold to erase it's bubble, and I look in this book the principles of bubbles is the build up exponentially, when they burst they burst in half the time typically it took them to build, and they go back to where the bubble started.
Not the whole bull market, whatever that is. When the started to diverge from the fundamental trends and went up more exponentially. Gold has to go down to $400 to erase that bubble and it may possibly at worst retest those 2001 laws around 250. I look for gold to hit $700 give or take in the next year or so. I won't have interest in gold until it gets at least to $400. Then I, would, love it because the next commodities will have been drive by emerging countries who hugely consume gold and silver, hugely consume commodities as a percentage of their income and the biggest producers and exporters of commodities.
I think the next commodity cycle is to be a doozy, but commodities have already crashed and won't turn around until at least 2020. Then, if gold's at $400 then I'd say, you know, I'll buy this and think it may go to $4,000 over the next commodity cycle, and that commodity won't peak until 2038 to 2040. I do not like gold. It's not the safe haven in a deflationary environment. It is the safe haven in an inflationary environment. Of course, once this endless quantitative easing breaks down and all these bubbles burst--
Again real quick just to summarize here the reason you get deflation in this winter season is that when debt deleverage money disappears. Loans are written off, that money disappears. When bubbles burst like the Dow goes from 22,000 down to 4,000, 80 percent of people's wealth disappears and doesn't come back for a long time. That creates less, money chases the same goods and financial assets and everything else, and that creates deflation in prices not inflation.
Chris Martenson: Well, and certainly very much non mainstream views. We have talked with Harry Dent, author of the new book The Sale of the Lifetime. It's chock-full of just fascinating thinking and of course to whom you should listen and editor of the free newsletter "Economy and Markets" found at HarryDent.com. Harry, anything else you need to tell people about events or how they can follow you more closely.
Harry Dent: No. Yeah. I think the best thing get on our free newsletter, because that's the way you can get to know us. I mean I think we've got limited months, maybe six months left in this market. I want by the middle of this year you to be convinced to make some very hard decision because everybody else, including your stock broker and your best friend and the media and everybody will tell you otherwise.
You need to make some hard decisions, and you won't do that unless you were convinced. So yes. Get the book and get on our free newsletter. We also have paid newsletters where we want to give more depth, but you need to have been convinced, so get serious about this, and hey if this doesn't happen in the next couple of years, then I'm going to quit my profession and be a limo driver at the Gold Coast in Australia.
Chris Martenson: Alright, well you'll fight for fares with me at that point in time. Harry, thank you so much for your time today. Let's do this again sometimes soon.
Harry Dent: Okay. Thank you, Chris.