Famed economist Harry Dent is calling for “the mother of all depressions”. Dent’s record is fairly checkered. He called for Dow 40,000 in early 2000, but is also famous for calling the 10 year Japanese depression and the 90’s stock boom in the U.S. While his record is mixed, there is some common sense behind his current thinking:
“When you have to deleverage a major bubble in stocks and housing and commodities . . . it doesn’t just get over with in one year with a nice stimulus program. You’ll see another crash late this year and into next year, as banking systems melt down again. I think the next one’s going to start in Europe and Eastern Europe, housing prices would lag.
“I think stocks are going to end up down 60 or 70 per cent before it’s all over, and I think housing prices in Australia will probably be down 40, maybe 50, per cent, maybe more than that in the United States and Europe.
“Peak spending is age 46, so we’ve been saying for decades, we’re gonna have this great, great boom and then around the end of this decade baby boomers are going to peak in spending, prepare for retirement, kids are going to leave the nest and the economy’s going to slow just like Japan did in the 1990s.
“Japan has already gone through a housing bubble, and a peak in generation spending, and you know what? Their stock market declined for years, housing declined 60 per cent, and all the government stimulus could not put Humpty Dumpty together again – that’s what we’re looking at.”
“Look at Japan to see what happens when a generational trend finally slows your economy and a housing bubble bursts. Housing peaked in 1991 in Japan and is still down over 60 per cent from the peak 18 years later.”
I think Dent is being a bit extreme here. A depression and 70% total stock decline are both highly unlikely scenarios, however, his logic behind the size and length of the de-leveraging is practical. Balance sheet recessions just don’t end with a one year decline and a stimulus package. Expect a tough slog, but it’s likely that the most dramatic and fear filled declines are behind us….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.