The New Market Bubble Theory
So here's the good news: The next five years will bring us the biggest stock-market boom in history. The bad news? The party will end in late 2010, after which we'll face the worst economic decline since the Great Depression.
Welcome to the world of Harry S. Dent, an economist and demographic researcher whose 1992 book, The Great Boom Ahead, called the stock-market bubble of the late '90s when few saw it coming. In his 2004 book, The Next Great Bubble Boom, Dent predicts an even bigger bubble forming over the next few years. That is, before everything crashes down around us.
We caught up recently with Dent to talk about where the markets are heading, and where to park our spare cash.
Wired News: What's the current outlook for stocks?
Harry Dent: We think the market bottomed at 10,000 (in 2004). We're coming up, threatening to break out of this trading range, finally. We'll probably pull back one more time first. And then just come to the top of it again. Then we'll basically see a five-year rally from about late 2005 into mid- to late 2010.
WN: You've revised your projections before. How sure are you about the timing of the boom?
Dent: If we don't see a pretty substantial breakout in the next few months, we may reduce our targets. But so far we're following almost exactly the scenario of the Roaring '20s and very closely to what happened in the '90s -- right before we broke into a bubble that no one expected. Obviously, it's hard for stocks to take off with oil going straight up to $71 a barrel. It's hard for stocks to take off when the Fed keeps saying, "We're going to raise interest rates higher and higher, and we don't care what the bond markets say about inflation." And every day, people putting more money into housing speculation is more money not going into the stock market. Now that housing is deflating, there's no place for money to go. The money has to go back into stocks. We see the Dow at 32,000 to 40,000, and probably on the higher side. The Nasdaq around 13,000.
WN: Will tech stocks lead the rally?
Dent: We see a broader tech boom, including biotech, resuming now that we're over this crash. Businesses have cut costs and expanded their ability to grow with past investments. Now, businesses are going to have to catch up and reinvest to keep up with consumers, who never stop spending. Businesses will come back big time, and that money largely flows into information technology.
WN: But won't memories of the dot-com bust of 2000 temper investor enthusiasm for another tech bubble?
Dent: No it won't. People say, "Oh, how could we have another bull market with so many people pessimistic and hurting and wounded?" But the truth is that bull markets don't start with the everyday investor. It's an S curve like anything else. The smart money starts buying in. The markets start going up. The more the markets go up, the more people get drawn into it over time. And the bubble ends when everybody's in. So all of these people who got hurt the most and say, "I'll never buy stocks again" or "I'll never touch tech stocks" ... let the market go up 30 (percent) or 40 percent a year, year after year, and see how many change their minds. It's like the housing thing. Everybody says it's nuts. It doesn't make sense. But it just keeps going up and up. The next thing you know, everybody has bought a condo. Everybody has bought a second home because they think, "Hey, this is a good investment."
WN: You predict this new stock-market bubble will burst in late 2010, followed by a long decline. Are we talking about something like the 1970s or more of a cataclysmic downturn like the Great Depression?
Dent: I'd say it's going to be in between. It won't be as extreme as the Great Depression. But it will be worse than the '70s downturn, and I think it will be worse than what Japan saw from 1990 to 2003. Maybe we'll see unemployment at 15 percent, give or take. The worst part of it is you're going to see deflationary trends in prices from a shrinking work force. Deflation is the enemy of asset prices. You've got to remember that in the '70s, while the Bob Hope generation was declining in their spending, you had a bigger generation coming behind them entering the work force and picking up some of the slack. Now you've got a smaller generation following the largest generation in history. So it makes the downward trend even more pronounced.
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