Bruce Norris is joined this week by Harry Dent. Harry is the found of Dent Research and Economic Forecasting Firm. They specialize in demographic trends, and his mission is to help people understand change using years of hand-on business experience. Mr. Dent offers unprecedented and refreshingly understandable tools for seeing the key economic trends that will affect your life, business, and investments over the rest of your lifetime. He has authored many books, including The Great Boom Ahead, and his latest book The Economic Cliff. He is also editor of the free newsletter Economy and Markets.
Bruce has a lot of respect for Harry Dent. There are two main things he does that take guts. One is that his titles leave no doubt as to where he stands, and he has been both a bull and a bear when he thought it was appropriate. This is something not everybody does. Bruce asked how he got into demographics. This is something that is very unusual for someone to take on, and he did it early in his life. Harry said it was not from taking economics courses. He came out of Harvard Business School as a consultant with one of the top 100 companies. He started seeing how the baby boomers were changing things. There were so many of them, but he really got it when he started doing the same type of strategic consulting to new ventures who were almost exclusively to young baby boomers who were coming along and starting new trends. They ended up driving our whole economy from 1983 to 2007.
A couple years later he found there was a direct correlation between a 46 year lag on the birth index and booms and busts in the economy. This is when the average household spends the most money in their lives. He got into this through consulting and trying to help his clients see changes coming. He ended up finding it was really the key to macroeconomics as well. One of the statements in his book says that people do predictable things as they age. This appeals to Bruce because this makes sense to him. As he has grown up from a young adult getting married, he can see his peers finding themselves doing very similar things. Harry has a lot of categories he looks at and says when you are most likely to peek at whatever product you want to mention. The macro is age 46 for the average person, and for the most affluent it is age 53. This is right now, so there will be some surprises next year as well as on car sales.
We can look at baby cribs all the way to nursing homes and everything in between, there are things we spend on different things in our life. It is not just the macro economy, but we can see which sectors of the economy are likely to do best at times. Even in downturns there will be sectors like health care, travel, and financial planning that will continue to do better than other categories, even when he sees a downturn for the next several years.
In real estate they would take a look at a large participant, even hedge funds, who came in to an area and bought or made an offer on everything in sight. They would be considered market makers where they could change the market in whatever way they did. The baby boom generation has been that market maker. Whatever age they have been in has been the dominant thing that was sold or invested. The thing that made it easier for Harry to discover how important they were was how many there were. That generation was so much larger in magnitude than the Bob Hope generation before them. Even those who talk about the Echo Boom or Millennials coming behind them don’t realize it is not the same magnitude of increase. When you count all the immigrants who came more into the baby boom generation, there are still more peak baby boomers than millennials.
This is the first time in history we are going to see a generation smaller, but the baby boom was an outsized generation. Someone called them earlier a pig moving to a python. They exaggerate everything, including the boom, the bubble, and now this downturn. The government will have to keep printing trillions of dollars to offset the natural slowing. Older people not only don’t borrow money, they pay down their loan. They don’t buy durable goods, especially automobiles after this year, and they spend less on just about everything, even food. He can tell when people eat the most calories and weigh the most, and that is age 60. It is no wonder that weight watchers and weight loss places are doing so well right now. The baby boomers are at their heaviest now and into the next 7-8 years.
Obviously we are not the only country with a baby boom generation. In 1989 Harry wrote Our Power to Predict in which he talked about Japan’s baby boomers. In this book they predicted Japan would take a big fall in the 90s while the US, Europe, and other countries had the greatest boom in history. Nobody saw this combination happening. Some people in the early 90s like John Templeton did see a boom, but they saw it more on the globalization trend while Harry saw it more on the global demographic trend. However, there was nobody who saw that Japan was going to crash because their baby boom came much earlier than the US and Europe. It is demographics that allows you to see around the corner.
There is expected to be two surprises over the next two years for the global economy. One is that Germany will continue to disappoint and has a deeper slowdown in demographics than Japan did in the 90s. China is the only emerging company that is going to see their workforce and demographic trends slow down modestly over the next decade and then rapidly after that. Everybody thinks China will grow forever and Germany will hold up the European unit. Neither are going to happen. When the T-bill started getting very low, Bruce started poking around and found out Germany’s ten-year T-bill was at .44%. This was something he did not expect.
Harry can see the issues with Germany since people do not understand the difficulties in their economy. They are going to be running deficits in the future, but Japan is down there in those low ranges where they have the highest debt ratios of any major country in the world as well as the fastest aging population. Germany will have a rapid, almost as rapidly in aging population, but they do not have anywhere near the debt problems and real estate bubbles that Japan had and has. China has the greatest bubble of any country in history since their government drove their economy, has overbilled everything, and has pushed people from urban to rural areas 2 to 3 times as fast as any other country.
Harry is predicting that over the next several years is that China will go down hard. There will not be a soft landing in China because he has never seen such a mismanaged economy. They have 20% of condos empty, 30-40% access capacity in all their major industries. There are so many bridges, roads, and railways to nowhere, empty malls and offices, and it is the biggest disaster in history. You have 220 million unskilled people being forced out of their farms and into these cities. They cannot even go back to their farms because they have been paved over with empty condos. China will go down as the greatest economic disaster in history, and he feels badly for the 220 million people who are going to be trapped.
Bruce wondered why they did this, and Harry said there was a little secret they discovered in their demographic insight. The way most countries grow and develop is by urbanizing and industrialization. Even today in third world countries like India, Brazil, and China we can measure that when you simply move someone who is uneducated and without skills into the city their income doubles and more often triples. This is the fastest way to increase your GDP.
China wanted to do this even faster, and the only way they could move people that fast is to build things for nobody. That is what all these empty condos and malls are. China is thinking one of these days they will meet them; but if you look at their demographics with a shrinking workforce for the next several decades, they will not need all these empty structures. They build enough for the rest of the rural population to move to cities in the next to 10-15 years, even if they move at the same rate they did in the past. This is something that will never happen.
Since they overbuilt everything, China does not need more infrastructures. They have to come to a point to where they stop building for nobody. When they do that, they will have massive unemployment, real estate prices will collapse, and more. This is why this is the biggest disaster in modern history. We do not even know of a real estate bubble compared to China’s. Their real estate bubble takes up seven times since 2000’s. Ours a little bit more than doubled with the real estate problems we have had.
Bruce said there is an interesting side effect to this. Bruce spoke up in Northern California, and one of the audience members said he had bought a million dollar home in San Jose. In two years it was worth $2 million. He was going to hold onto it until it was worth $7 million. He thought this was a lot of expectation for one house. He then told Bruce he was from Shanghai, and that is what happened there. Not only do you bring the money that came from that transaction, but you also bring the expectation as well as the carelessness. Harry said he wanted to see the $2 million home as it probably looks closer to a trailer than a mansion. In another example, two homes that were bought for $50 and sold for $500 were barely livable.
When Japan had the boom during the 80s, that also had ramifications for our country in some assets. Bruce said he was more familiar with what it did to real estate. However, they brought their money here. It was just like the Chinese. They are the ones buying the largest percentage of homes in Southern California as well as Vancouver, London, Toronto, San Francisco. It is the same thing all over again. They make a fortune on their real estate bubble, then they take those profits and reinvest them into key leading cities, especially where there are good English-speaking schools. This includes California, New York, London, Singapore, and Australia. If they stopped buying at the edge, then there was nobody left to buy.
A year ago a condo went for $13,000 per square foot. This is $120 million for a 7700 square foot condo in downtown Manhattan. This will probably be worth $10-$15 million before it is all over with an 80-90% drop. A similar thing could happen in Shanghai because they have bubbled up more. They do not have the income there. Even in California and the US there will likely be another drop in real estate in the next few years, and it is going to be worse than the last one. It will go lower, and as usual the places that will do the best are the apartments in the sweet spot of the demographic cycle for the next generation. As fewer and fewer people have confidence in prices going up to be able to obtain a loan, apartments are likely to do well. This is especially the case with high-end homes such as mansions.
In Northern Tampa, Florida they are in a little trophy area. It got hit on a lag last time, but they did not think it would go down any harder than where all the sports stars did. Things that bubble up the most go down. They just had a 30,000 square foot marble French mansion that was on the market for $24 million for years, and it finally sold for $5 million.
When the Japanese boom ended, Bruce wondered what happened to the investments they made outside the country. Bruce asked if they were leverage investments or if they owned most of it free and clear when they bought. Harry said he does not think they always had it free and clear, but they were overextended by using their profits from their real estate in Japan, which had bubbled up dramatically. When all your real estate assets start to collapse, you have to sell some to cover others. You are more likely to sell your foreign real estate than you domestic. Bubbles feed on bubbles. The government makes money cheaper than it should be, they guarantee loans, banks lend with no money down, and everybody just keeps going.
The illusion with real estate has always been that it is the one thing that cannot go down. Everybody knows stocks go down, they just don’t think it will happen to them in their timeframe. They often think a bubble happened for a different reason than it did. Anybody alive today has not seen real estate go down substantially until 2008. Some high-end sectors in California got hit in the early 90s and Texas got hit with the oil crash in the 80s. However, overall we have seen real estate go up all our lives because the first middle class emerged during World War 2 and just started buying real estate like crazy and people qualified for mortgages for the first time. The baby boom then followed them. We do not understand real estate.
Robert Schiller showed this with his longer term analysis that if you adjust for inflation and the size and quality of the house, homes are not appreciating assets. This does not mean you cannot make money on them because they generate income from rents and can save you the mortgage for rents. However, they are not appreciating assets. Stocks averaged 7% over long period of time adjust for inflation, but homes do not. Gold is the worst. You cannot even get income off this, and when you adjust for inflation over hundreds of years, gold does not appreciate and is not an appreciating asset.
Stocks are good for long-term appreciation, and real estate is good if you buy good things and rent out a positive cash flow just like we learned in monopoly. Gold only does well when inflation is roaring, like in the 60s and 70s when everyone thought it would protect them. Gold got slammed in the 2008 crash and did not protect people. We keep saying it will keep going down and will get slammed again. Harry said he could see gold at $250 to $400 within the next several years. He thinks it could even be worth $700 within two years.
Harry’s book The Great Boom Ahead was published in 1992. There were a lot more books that were very bearish and sold a lot more than his did. His sold from 1995 on, but from ’92-’93, you had The Great Reckoning, Bankruptcy Nightmares, The Great Depression. The Depression books were selling, and everybody was saying the US had seen better days. We said the opposite that Japan was going to take over the world. The US was just coming into its baby boom, and Japan was just getting ready to peak and go down. In addition, their whole real estate and stock bubble was going to collapse. It is pretty obvious if you look at it, but people extrapolate trends.
We have been doing this with China, which has grown between 8 and 10% for the last couple decades. People have been predicting China will be the biggest economy in the world, and they are not. They are going to slow unbelievably and have the biggest Depression in history, possibly much worse than ours. With our demographics, we have a substantial echo boom generation, not larger than the baby boom but it almost replaces it. Europe does not have this as much, but Japan and all of East Asia and China do not have this. Down the road we will look okay, and a lot of the country’s people say it will do great and we will stay just like Japan did in the 90s. If you just look at demographics, you would have known that it was impossible for Japan to overtake the US economy unless they made three times as much money per capita as we do. They are good, but they are not that good.
Another book Harry wrote was The Great Depression Ahead in 2009. At one time he felt this was the likely outcome and that it would probably already be in full swing. Bruce asked what happened that prevented the outcome he thought was going to occur. The book was written in late October 2008 in the midst of the worst of the crisis and was written several months before that. They predicted twenty years ago that 2008 would be the beginning of the slowdown of the baby boomers and the bursting of a big bubble market. However, he did not even remotely consider that for the first time in history, central banks around the world would not only put interest rates at zero, but they would throw $10-$12 trillion in cold, hard artificial cash into the economy.
Central banks always lower interest rates, and governments always run some extra deficits as well as spend extra money to help. However, this has never even remotely happened. What they have done is refueled the bubble. In other words, in 1929 the bubble burst and all types of debts went bad. Banks went under and depositors lost money, but debt deleveraged substantially. We went from 200% debt to GDP down to 60%, which made our economy stronger long-term. This included housing, commodities, and the cost of living went down. This made the economy stronger and the standard of living better over time. However, it was a depression and debt deleveraging, and this was always the most painful thing that could happen to the economy. This is what we expected would happen.
It did not happen because governments stepped in, and now we are saying we have had 5-6 years of them pumping up the bubble and there is more income inequality than ever. Stocks are more overvalued than ever and there is more debt than we had before the last bubble even though some consumer debt deleveraged. Corporate debt is higher, and companies have been borrowing money at nothing to buy back their stock and make their earnings better than they are. Speculators are taking money and levering up 30-50-1. This is why oil is bubbling up and crashing again just like last time. All the central banks kept the bubble going and kept the imbalances.
We are going to have to deal with this debt and deal with these bubbles. Unless they deflate, the next generation has no chance of affording a house, no chance of investing for retirement, and no chance of having anywhere near the standard of living we had. We are going to have to go through this, and we are seeing that everything is cracking. They tried to hold it together in Europe, and we said no because things get worse. They are not able to hold it together, and things are going to get worse. China’s bubble is starting to crack, prices are starting to fall, developers are discounting up to 40%. This is something they have never done in China and is against the Holy Grail. They sell overvalued real estate to affluent investors who do not rent out because there is no rental market in China. If you do not own at least 300 square feet, you have no chance of getting a date or anything. It is not a rental society, so they just leave these things empty.
This is what makes it so dangerous over there. The whole thing is a bubble, and bubbles always burst. The greater the bubble, the greater the burst, and the greatest bubbles happen in the hottest cities. All these people Harry knows in New York, LA, San Francisco, Sydney, and London think these are the places that cannot go down. Instead, these are the ones history proves go down the worst before they finally burst. The intervention definitely prevented a much worse scenario that would have unfolded in California real estate. Even given that we went from $600,000 to $250,000, and it took less than 18 months to accomplish that.
When they stopped foreclosing on properties and stopped putting that inventory in the MLS, you had a RESPA in all the policies that came in between that. Had they foreclosed on everyone who stopped making a payment, it would not have been comfortable to see what had happened. At the end of the day you have to look at that and say it did prevent a great depression only to say that what is next may not be any more pleasant but is what will be discussed. Harry said it can only be worse. If you take more of a drug to keep from coming down, you are only going to crash harder. That is what life says.
If you want to check out Harry Dent’s materials, check him out on his website at www.harrydent.com. They have a free daily newsletter and high content that is very educational. Www.dentresearch.com is where you can learn more about the company and all they do as well as their methods and broad array of services. Tune in next week as Bruce continues his discussion with Harry Dent, author and economist.
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