Bubbles Are Getting Bigger

05/15/2013 8:30 am EST

Focus: MARKETS

Harry Dent

Author, The Demographic Cliff

Stimulus-addicted markets are driving riskier practices that could make the next crash, when it comes, substantially worse than the 2000 and 2007 bubbles, says Harry Dent.

My guest today is Harry Dent, and we’re talking about prospects for the market in 2013. Thanks Harry for joining me. So what do you think? We’ve had a pretty good run up to now. We’ve had a significant run just in the last month or so.

Yeah, we have. My view of the market is very simple: it’s just bubble, burst, bubble, burst.

Now, the first couple bubbles, the one that peaked in 2000 and then the one in 2007, had demographics and technology advancing behind that was real progress, even though we got overdone. This one is entirely generated by quantitative easing. This economy would’ve gone much deeper in recession—we would not be growing.

In fact, I dare any economist that said the economies are sustainable now: take away quantitative easing for one year and this economy will fall. In fact, the stock market would be dropping 20% in a couple days if the Fed just announced it was going to take the money back.

Do you think they’re going to continue additional quantitative easing this year?

They have to, they have to. They want to taper off, but if the economy weakens again, our view is very simple: It’s like any drug. It takes more and more to have less and less effect. It’s not real. It’s steroids, it’s crack, whatever you want to call it...and that’s what I call it.

The market’s on crack; the economy is in a coma. That’s what we’re dealing with, so they’re reviving it with artificial money. It goes into the banking system, keeps them from having to write off loans and take losses, keeps them liquid.

They turn around and reinvest it—guess what, 30 or 40 times leveraged—they buy bonds, they buy stocks, they’ve got commodities, they buy gold, whatever. It pushes up the markets, keeps wealthy people having money.

And people don’t realize they’re just raising taxes on the top 1% to 2%. Well, the top 2% control about 20% of the spending. The top 10% control almost 50%. It is affluent households in this country that are still spending. They peak in their spending later than the average family—they peaked back in 2007.

So I think what happens as you move forward, the Fed is fighting 92 million baby boomers that are going to spend less no matter what they do. They’re fighting $58 trillion in public and private debt that’s so heavy it weighs down our economy. They’re just going to have to do more and more and at some point...

Even Japan’s proven this. Japan’s been stimulating since the late 1980s. They’ve been doing quantitative easing. It revs up the economy three or four years, and then the economy just fails anyway, the fundamentals take over.

So I think what happens sometime in 2013, between 2013 and 2014, I think we transition from the bubble. We’ll see probably new highs in most indices, not a lot higher this year, but new highs. It’s going to get choppy at some point, and then I think you see another crash.

What’s going to be the catalyst for the crash?

Well, there are a lot of things. I think the upper-end households starting to get more conservative realizing their tax is going up; they do peak in spending later. Their kids are getting out of college now, so I think they may slow down unexpectedly.

The biggest single catalyst could come from Greece and Spain. I mean, they’re in trouble. Greece is in an outright depression. No amount of stimulus has been able to turn them around. Spain is headed in the same direction.

People don’t realize that when you have a bubble economy and everything’s so stretched with debt and leverage, all it takes is a little trigger. In the last worldwide stock crash, every country in the world went down. China was down 70%. Every country was down.

It was triggered by one thing—four states and their subprime prices, California, Arizona, Nevada, and Florida. Four states...and you know what the population of those four states, about the size of Greece, Spain, Portugal. Those countries blow up and that could cause a crash. So there are a lot of things.

China’s got the biggest overbuilding bubble and the greatest real estate bubble by far in the world; almost all the cranes in the world. That’s going to burst at some point, but that’s probably the last thing that’ll happen. There are many things that could trigger it, but I’d say a blow up in southern Europe is the most likely single event.

What do you think the market will get down to?

Well, our projections show a very simple pattern. Each bubble has taken us to slight new highs, like in the S&P. So the S&P could go as high as 1,600 in 2013...and then each crash has taken us to slight new lows. That would mean about 6,000 on the Dow and about 600 on the S&P 500.

That’s a 60% correction; it’s called a megaphone pattern. So the new normal to me, as Bill Gross said, 2% in bonds, 4% in stocks. Hey, I would take that happily if you could get it.

The new normal is just a greater rollercoaster because we've got markets on crack. All this Fed stimulus, all this money pushed in the financial system, just creates bubbles.

And governments are just keeping the bubbles going. The very things that created all our problems. All this debt and all this overvaluation and craziness. They’re keeping it going because they know that burst, it’s going to be really messy, and nobody wants it to burst on their watch—not Ben Bernanke, not any president or prime minister. So they’re just going to do it until it fails.

Related Reading:

Has the Next Bubble Already Burst?

Income Investors, Beware the Bubble

China Bids to Prick Property Bubble

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