Ultra-bearish author and newsletter writer Harry Dent was on CNBC’s Closing Bell yesterday debating the future of the market with Seth Masters of Bernstein Global Wealth Management. Masters sees the Dow hitting 20,000 in several years, which seems to be a reasonable assumption. However, Dent expects the Dow to land around 3,000; way out of the mainstream of forecasts.
Dent pointed out his firm tracks demographics and they were more bullish than anybody in the 1990′s and 2000′s. They saw the giant generation of the baby boomers borrowing more money, spending more money, along with technologies and the internet rising, Dent said. Now it’s the opposite where from 2008 to 2020 the baby bust points the trend downward with less home buying, less spending, and boomers saving for retirement. “There’s no way you can stimulate your way out of this,” Dent added.
Dent said he would agree with Bernstein in normal times whereby 20,000 would be a reasonable target. However, when an economy has experienced a debt bubble followed by demographic headwinds you see markets fall 70-80%, he said.
When asked by CNBC host Amanda Drury what timeframe Dent expected the collapse to occur, he responded the government has been preventing the deleveraging of the debt bubble by forcing money into the banking system. He added we don’t just have $16 trillion in government debt, we have $42 trillion in private debt that is deleveraging; along with $62 to $80 trillion in unfunded entitlements. He called this the biggest debt bubble in history and when it deleverages stocks collapse the worst. Dent pointed out the big debt bubble deleveraging which occurred from 1930 – 1933 and resulted in an extreme crash. He sees the market bottoming in late 2013, or into 2014.
CNBC host Scott Wapner questioned why either of these forecasts could be considered credible and how Dow 20,000 could be achieved with all the issues we face. Masters said he expected the Dow to hit 20,000 over the next 5 to 10 years. He pointed out it would only take growth of 5 to 7 percent per year to achieve that level. Masters said that demographics matter, but sentiment matters much more. Masters said the sentiment right now is “absolutely terrible.” People are taking billions out of stocks and investing in Treasuries where the 10-year yield is less than 1.5 percent and less than inflation. This is a problem for people with long-term objectives such as funding retirements, he added.
Masters said there are two risks in the world; one is the short-term risk of market fluctuations, and the other is the long-term risk of investors failing to reach their objectives. The only hope of avoiding the long-term risk is to own things that have a higher return than bonds do right now and stocks will have a higher return in all likelihood, said Masters.
When asked where he would be putting investor’s money, Masters said he would’t “go crazy” on stocks because right now they are volatile. They would tell investors to understand their financial objectives and take only as much risk as they need to take given what their objective is and how volatile stocks are. For someone who is normally 60% in stocks they would be slightly underweight today down to 54% because you want to take that very high volatility into account. They wouldn’t pull the plug on stocks completely because then investors would be guaranteeing the failure of their long-term plan, said Masters.
The debate continued with Dent further commenting on his dire forecast and how a similar deleveraging resulted in Japan’s market falling 85%, while Spain and Italy are down 60% and nowhere near a bottom.
Update: Harry Dent made an appearance on August 6, 2012 with CNBC’s Maria Bartiromo reiterating his bearish views. A skeptical Bartiromo asked Dent what he based his scenario on. Dent explained the birth index and the associated booms and busts. Dent said he moved from Miami to Tampa and rented saving a fortune. Dent also suggested he would know when people should buy again.