Bruce Norris is joined this week by Harry Dent. Harry is the founder of Dent Research, and economic forecasting firm specializing in demographic trends. He has been the author of many books, most of which Bruce has read. These include The Great Boom Ahead, The Great Depression Ahead, Demographic Cliff, and The Sale of a Lifetime: How the Great Bubble Burst of 2017-2019 Can Make You Rich.
Episode Highlights
- What huge event in the industry could lead to future unemployment?
- What are Harry’s thoughts on deflation and how it could affect the market?
- Which sector of the market has actually bubbled more than real estate?
- What would happen should we have another burst in California compared to other states?
- Which areas of the country are we seeing real estate bubbles happening?
- What is the concept of disruption in the real estate market?
- Does he see another technology revolution happening in the future?
Episode Notes
They had just discussed real estate, Bruce thinks we are pretty well-placed. In California, we have watched the financing change to where the bulk of it is all people who had to put 20% down and got fixed loans as well as have reasonable loan-to-value payments. A shock within the industry does not feel threatened to Bruce, but when you are saying $100 trillion could disappear, that is completely out of their hands.
Harry thinks this next event, whatever kicks it off, will cause a lot of unemployment. This happens when bubbles burst in everything from stocks to real estate. He used to say years ago that oil would go down to $10-$20 a barrel and commodities would collapse, and people said this was impossible. However, he said this is what bubbles do. Bubbles become so exaggerated by overly-optimistic expectations that when they burst they do not correct 20-40%. Instead, they correct 40-50% in real estate and 80% or higher in commodities and stocks. We have real estate go through a big downturn from 2006-2012. With all this quantitative easing and free money, everybody has gotten a free gift here on mortgages.
Bruce looks at charts a lot. When he speaks in front of people and is looking at the dichotomy of the charts, he notices the default rate soaring and the trustee sale tanking. We are going up geometrically in the defaults and declining in foreclosures. Those two numbers cannot go together except government intervention. It completely did not crash the way it should have. Harry showed in his new book how bubbles are not black swans. They build predictably and exponentially faster than fundamental trends. When they crash, they go back to around where the bubble started. This is not talking about the bare market low way back in stocks, bonds, or real estate. They go back to where the bubble started to diverge from reality.
For stocks, Harry marked this as late 1994 when the Dow was 3800. He marked this for real estate, which does not have as big a downside as stock. However, it is more leverage for mortgages. He marked this as January of 2000. In different parts of the world it might be 1998 or a little bit different. However, if you look at what your real estate was worth in California or anywhere in January 2000, and people will be shocked to see that it is a lot lower than it is right now.
We had a mild downturn in California from 1990-1996, then it went back up from 1997 to 2000. We were about $200 median price. At the bottom, we were at 2 ½, or $245. It was devastating to go from $600 to $245, and it seemed like the industry had a Great Depression. If nobody else joined, it was definitely felt here. We have to endure another one of those, but not for the same reasons as what Harry was saying. If you look around the country, the biggest bubbles the last time around were in Las Vegas, Phoenix, and Miami. There were even more than California, and these crashed the most because of that. This time around, they did not bubble as much. A large part of California has bubbled more than most areas, and now new areas like Denver and Dallas have bubbled.
Harry describes in his book how in areas like real estate, bubbles are much more varied given that supply and demand in local areas and regions. You have to look at your bubble. Omaha did not bubble much, so it will not burst. However, parts of California did bubble again, so now Denver, Dallas, and Houston have bubbled more than they have in years prior. Real estate is where there are the greatest opportunities for investors because, unlike stocks that tend to go up and down together, real estate has much greater variety in the bubbles and the burst. Therefore, you can make more money by saying, “Here is where it is over-priced and will be the most valuable.”
He tells people no matter how much they see a bubble burst, California real estate and places like New York and Manhattan are always going to be worth more than Omaha, Kansas, and other places. When the bubbles burst in places like California, this is when you will have the greatest bargain and sale of a lifetime. Bruce said if this happens he will try to be on the right side of it. Bruce said we seem to have a playbook in place. We had a big problem in 2008, and the solution was we just create money. People were saying we did not have a crisis here or a debt bubble, and they thought they could just create free money and a bridge over troubled water. Harry said this never happens in history. You have to let a bubble burst, and it will be painful. However, the bursting of the bubble reduces the cost of business and living, similar to the 1930s. This is part of what it takes to create a boom after a bubble.
We should not be saying we cannot let this bubble burst. We should just be having government encourage the bubble burst and help to restructure debt against real estate. Instead of what happened with free money and quantitative easing in 2008-2009, what if the banks were forced to write down real estate loans to businesses and consumers against that bubble? This could then relieve people of that debt. This would have been a positive for the economy but bad for the banks, investors, and bond-holders. It would have been a positive for the consumers and businesses, which drive 80% of the economic growth.
This is what happened during the Great Depression. We had high unemployment and bank failures while financial assets collapsed and loans were written off and restructured. This took a huge burden off of people in businesses. This is what needed to happen. We need to take our medicine, say we had a bubble and that we borrowed too much. Banks went too much and real estate went up 2 ½ times in 6 years from what it should have been valued at with the same income. We just need to have a reset and go on, lick our wound, and grow again. We did not do this and took the easy way out instead. We thought we could print $13 trillion globally, $3 ½ of it in the U.S. to cover up the debt crisis.
Now we have another real estate bubble, and stocks have bubbled much more than real estate. People should worry the most about their investments and stocks. Bruce said he was surprised with the way they handled foreclosures. In the 1990s when California had a downturn, we went down about 4% a year for 6 years in a row. This was their total hit at 20-24%. However, there was also a year where Fannie and Freddie came out with a memo saying if somebody was behind by 100 days, you had to initiate foreclosure. This was because the lenders were dragging their feet.
In this cycle, they did not have to send out a memo, they just didn’t foreclose. Nevada was the worst hit, and 70% of the people were upside-down by so much. If the lenders had foreclosed, it would have been a $.20 on the dollar event. They did foreclose or kick out anybody. What they created was a housing shortage. If you go there now, they are building more homes than in Riverside by a long shot. There was a housing shortage, but nobody could move out of the home they had.
Bruce said he thinks sometimes people learn by what they did, and they think it is successful. They have a playbook now, and Bruce asked Harry why he thinks this would not play out again to the next level of debt. Harry thinks the same thing will happen again, but it won’t be for this time since the unemployment will be higher and the economic downturn will be stronger. Government has decided to not have the next Great Depression. The economy in 2008 was just like 1930, and we could have gone down for another three years. Real estate could have gone down 40-50% instead of 34%. Stocks would have gone down 80% instead of 55%, and we would have had a bigger washout. Government stopped that, so now we have to go back and revisit that because you cannot go from winter to spring without a big freeze over and thaw.
Bruce asked why we would let something like this happen this time. It seems they have a playbook they have faith in that says we can prevent this by sending up more debt or helicopter money. Right now mortgage rates are going up, and this was predicted a year ago. This whole bond bubble of pushing interest rates down artificially, especially long-term, would reverse because everybody would pile into this trade and go one way. Something would start to go wrong, and now rates are increasing. Mortgage rates were 3-3 ½%, but what happens when they are 4 ½-5% or higher.
In a real estate market, it was already over bought and only coming back because of artificially low mortgage rates. You don’t get something for nothing, and we have gotten something for nothing now for years and years in bubbles. Now with free money and money that is 0 when adjusted for inflation, you cannot grow with something for nothing policies. However, this is what governments have done. Free money is not good for the markets even though it makes everybody feel high. However, when people get high they make bad decisions. They buy real estate they should not buy and get more house for their money than they should. When everybody over invests, you have a bubble. When it collapses, it returns back to reality like a crack addict going through detox.
Bruce said if we really have this cycle with problems like Harry is suggesting, then he wondered what interest rates would be in this phase. Harry said ultimately they are going to be lower, which is good for real estate down the line. What is happening now is interest rates are being forced back up to normal levels. A ten-year Treasury bond should be 3-4%, whereas it has been 1 ½-2% recently. When rates go back up, they are just resetting. This brings real estate back to more realistic prices. With a reset, they will go down because when the economy declines and asset prices go down, we will see deflation in prices and a ten-year Treasury at 1% or lower in the years ahead. We could also see mortgage rates at 3% or lower. This will make a decline in real estate prices even more profitable because you will be able to borrow even lower against that.
People don’t see this happening, but this is deflation and is actually a good thing. Deflation lowers the cost of living and investing in real estate and financial assets. It is a good thing long-term but is very painful when you get that reset and stock prices collapse. Real estate prices also collapse along with mortgage loan rates. They may be a negative thing at first, but in the long-term it is a gift from God. Everything ends up being cheaper for borrowers.
Bruce said in the last year he was looking at charts, and he told one of his friends that he does not think we are fighting inflation anymore. We are trying to prevent deflation, and he thinks we will see a 2% mortgage rate. He does not know the timeframe; but when you look at all the charts he wondered how you have 4 ½% unemployment and 1 ½% GDP growth when a ten-year T-Bill at the time was 1.6. Those two charts have never coincided.
Harry said he would give Bruce a timeframe where we will see the lowest mortgage rates in a lifetime, just like the sale of a lifetime on every other metric between 2020 and 2023. Harry agrees you could see a 2%, 30-year mortgage. This is a gift from God, especially for someone who joined real estate in 1981 and refied their house so they could be an investor at 17 ½. Bruce said for him anything under 5 is a gift.
Bruce mentioned another category he found very interesting. From his studies he found the concept of disruption. There was a gentleman who did a presentation about electric and solar cars. Bruce asked his impression about the speed of change that might come to the oil industry since all of a sudden you can buy an electric car for the exact same price. However, everything after that costs a lot less. Bruce asked Harry if he sees that happening in the next few years to an industry that thinks they are fine. Harry said all of economic progress has been about things becoming radically cheaper. Automobiles were only affordable to the very rich in the 1900s, and by 1965 everybody had one or two of them in their garage. They were unbelievably affordable, and this is what technology does.
These kinds of things happen in surges. Harry listens to a lot of people talking about future technology saying we will lift $120 in stock. We may at some point, but not in the near future. Harry said his newest cycle in his research is a 45-year technology cycle where there is always innovation. However, it is when those innovations like automobiles and electricity move mainstream together or anything from the internet, broadband, and wireless phones move mainstream that we see the biggest impact on the economy. This is a 45-year cycle like a clock. First it was steamships in 1875, then railroads in 1920, and automobiles in 1965. Now it is the internet.
We had peaked, and we could see huge potential in both nanotech and biotech. These things are not going to hit by this cycle in the mainstream economy until the early 2030s. We have seen a massive productivity revolution; and now technology is more about Facebook and dancing dogs and cats. It is entertainment, but it is not like Google and email. Harry’s economic research business quadrupled because of email and Google and him being able to find things quicker. He has one part-time research assistant now when he used to have three full-time.
Harry thinks all the groundbreaking technology people are talking about will be less than we think, although it will still grow and innovate. However, it will not be like what we saw between 1988 and 2010 in the last positive technology cycle. When we do get to the next one between 2032 and 2055, people may live longer and this will change demographics. This is what happens. Technologies change our standard of living exponentially over time, but they also do it in cycles. We are no longer in a positive technology cycle, the doubling of technology chips every two years is fading faster than the speed of light. People are overly optimistic about technology.
Harry enjoys doing his own research, especially from his condo in Puerto Rico and his island house. These kinds of places would have tax benefits, although he did not move here for this reason. He had somebody tell him about a company in which he could be a consultant and receive the tax benefits. However, he moved there because he loved it. Bruce also does his own research, so he knows exactly what the benefit is. With Harry’s experience, he could have an “Ah Ha” moment way before somebody else would just by compiling data. He knows when he sees something special.
One of the best books he read was Outliers, which said you could spend 10,000 hours submerging yourself in research. This is exactly what he did in the 1980s, including part-time while he was a consultant. He started having one breakthrough after another from 1988 forward because he submerged himself into demographics and economic cycles enough to master it. Now the insights come easily, and he does not even have to think about it. One comes after the next because of the submerging he did. This is what people need to do. Bruce is an expert in real estate while Harry is an expert in economic trends and cycles. People need to listen to the people who have done that homework and emerged themselves into those areas of knowledge. These are the people you listen to since most people don’t know what they are saying. Somebody who really gets into the trends will understand what is happening, and others will not. Unfortunately, it is a small percentage of people. However, like Harry, Bruce would want them to make their own decisions and be responsible for their own decisions.