Bubble Boom Will Expand—Then Contract

05/22/2007 12:00 am EST


Harry Dent

Author, The Demographic Cliff

Harry S. Dent, Jr., author and forecaster, said at the Las Vegas Money Show that stocks will have two or three more good years, then the market could crash as the housing bubble continues to lose air.

We are still in what we see as the greatest boom in history of the United States and more parts of the world. I see the market up for the next three years, but we see a more extended correction for the first time in decades for the United States and Europe.

We are in a bubble boom. Bubble booms always end up badly for a period of time. Japan had a bubble boom in the 1960s, 1970s and 1980s and it burst. After the peak in the Japanese stock market in 1989-90, Japanese blue chips [went down] 80%.

Demographics is the most important factor driving our economy. And when we talk about demographics it is not population growth that's important; it is the aging of the population that is so important.

Here is the most important thing. Here is the spending cycle of the average family in this country. It grows from when we enter the workforce in our early 20s and peaks between 46 and 50 and declines the rest of our lifetime. It doesn't mean people live worse. It is that we save for retirement. But our spending goes down.

The biggest bubble perhaps for the United States and most of the western world has not been the stock market. We have not seen in US history a housing bubble as big as the one we just saw from 2000 to 2005, when all this money rushed out of the stock market into condos and speculation [and] second homes for baby boomers.

Long term, when you adjust for inflation as Robert Schiller from Yale has done back to the late 1800s, home prices up until recently have been flat. Housing has gotten way ahead of trend. And it will ultimately slow down and flatten, but it will not really slow and get back down to where it ought to be until we see an extended economic slowdown like Japan saw in the 1990s. If you own a house, especially an expensive house, you've got risk and people don't think that.

The next great crash in the stock market will probably happen between late 2009 and 2010 and then continue for years beyond that. Housing-maybe 2011 or 2012 before it really weakens, but then it will weaken long term and unlike stocks, which you can hedge, housing just drifts down and down and down.

[Right now] US stocks are still undervalued roughly 30% from US Treasury bonds. When you look at the yields you get on that Treasury bond versus the yield, the earnings on the Standard & Poor's 500, that alone would say the Dow [Jones Industrial Average] ought to be at something like 18,000 to 20,000 in the next few years.

So we still say it is time to be in stocks until our demographic trends peak. We just gave a very strong buy signal in June/July of last year.

This is going to be one of the most difficult times for investors. We have not seen the peak of this bubble boom and we have not seen all the major corrections. You need to review your portfolio, see where you stand, and get ready for more roller coasters until we get to a more stable economy worldwide again around 2022 or so.

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