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Harry Dent and Demographic Investing: Concept Better than Reality

By Jim Fink on February 16, 2012

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With Thursday Feb. 16th’s 1.1% gain in the S&P 500its largest gain in two weeks – the stock market is on fire! Several stock indices have hit long-term highs:

  • S&P 500: nine-month high (highest close since May 2011)
  • Nasdaq Composite: 11-year high (highest close since December 2000)
  • Dow Jones Industrial Average: 2 ¾-year high (highest close since May 2008)

It’s starting to feel like 1999 all over again thanks to central banks in both the U.S. and Western Europe opening the quantitative easing spigots full blast to keep their debt-laden economies afloat. Any market prognosticator who has been cautious or — even worse — bearish looks like a complete fool. 

Harry Dent Makes His Money from Writing Books, Not Investing

One bearish market sage who looks particularly foolish right now is Harry Dent, author of the 2011 book The Great Crash Ahead, as well as the 2009 doomsday “classic” The Great Depression Ahead. To be fair, Dent hasn’t always been bearish, having also written 1993’s The Great Boom Ahead, 1999’s The Roaring 2000s Investor, and 2006’s The Next Great Bubble Boom. Except for his book in 1993 which correctly predicted a strong bull market during the 1990s, all of his other books have pretty much been dead wrong on the market’s future direction. 

Given his poor track record, one could easily dismiss his most recent book The Great Crash Ahead as a contrary indicator that bodes well for the stock market. After all, on December 30th Dent was interviewed on Bloomberg TV and recommended that investors sell all their stocks, predicting that the S&P 500 would fall 30% to 50% in 2012 – right before the stock market staged its strongest rally to start a new calendar year since 1987 (25 years ago)!

If you actually read Dent’s latest book, however, his reasoning is quite persuasive. Dent’s forecasting expertise focuses on demographic trends and analyzes the effect of demographic changes on economic growth and corporate profits. Demographic investing is a real discipline and several Investing Daily articles have touched on this theme, such as:

Harry Dent’s Stock Market Forecasting is Based on Demographics

Although Dent doesn’t have a graduate degree in economics, he did graduate from Harvard Business School so he has some intelligence (perhaps just enough to fool people?). His basic approach to demographics is as follows:

  • Stock prices rise if profits rise and profits rise when consumer spending increases because consumer spending is 70% of the U.S. economy.
  • A person’s earnings power and spending peaks at age 46, plateaus until age 50, and then drops precipitously after age 50 when kids “leave the nest” and continues dropping until death.
  • The more people who are aged 46-50, the more aggregate consumer spending occurs and the more profit corporations collectively make.
  • Stocks rise when the number of people aged 46-50 are rising and stocks fall when the number of people aged 46-50 are falling. Dent calls this age group the “best long-term leading economic indicator.”
  • The 46 age group peaked in late 2007 because the U.S. birth rate peaked 46 years earlier in 1961. The four-year plateau period ended in late 2011 as this peak age group turned 51 and consumer spending will consequently plummet in 2012.
  • The spending decline won’t begin in earnest until the second quarter of 2012 because it takes between 8 to 10 months for the stimulative effects of quantitative easing to wear off. The Federal Reserve’s QE2 reached its maximum dollar amount at the end of June 2011, so stocks will probably begin to decline in March 2012 but no later than the end of April.
  • Once consumer spending falls in earnest during the second half of 2012, the Federal Reserve will attempt QE3 but it will be “too late.”
  • The stock market won’t bottom until 2014 with the Dow Jones Industrials falling to a low somewhere between 3,000 and 5,600 with 3,300 the most likely end point. After hitting bottom, stocks will then muddle along interrupted by a mini-rally in 2015-2017 before falling into a final bottom during the 2019-2023 period when the 46-50 age group troughs because the U.S. birth rate troughed in 1973.
  • China’s population is aging even faster than the U.S., so don’t think that investing in China will protect you from the coming demographic deflation in the developed world.
  • Emerging markets with young populations like Chile, India, Malaysia, Singapore, and the Philippines are your best bet for future economic growth and stock market gains.

Entertaining predictions to be sure, especially since Dent presents them so specifically and with such confident certainty! Unfortunately, academic studies have found that people are more likely to be persuaded by someone if that person expresses confidence and certainty, even if that certainty is a preposterous attempt at “future babble” to predict the unknowable future.  

Harry Dent’s Abysmal Track Record

Investors are advised to rely on a financial advisor’s performance track record rather than his entertaining predictions. Based on performance, Dent should be avoided at all costs. His first attempt at money management occurred in June 1999 when he managed a mutual fund called AIM Dent Demographic Trends Fund, but it folded in 2005 after losing 80% of its assets. His second attempt began in September 2009 with the introduction of the AdvisorShares Dent Tactical ETF (NYSE: DENT). Its assets under management have shrunk from $24 million to a minuscule $8.3 million and it has massively underperformed the S&P 500 by more than 40 percentage points:

Source: Bloomberg

So, we’ve established that Dent is an overconfident economic charlatan. But charlatans — like broken clocks — sometimes are proven right just by sheer luck. I can’t help but think that this could be one of those times, at least so far as an imminent stock market correction is concerned.

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  1. avatar
    LMOSS Reply February 18, 2012 at 10:52 AM EST

    I subscribe to one of Harry’s newsletters just to get a contrarian view point that is counter to all the other contrarian view points. He believes that all of the money printing that is going on is not inflationary since so much wealth is being destroyed by “bursting bubbles” and that our next big crisis is going to be deflationary, not inflationary. Basically we are following the Japanese example of entering a long term deflationary recession or depression. Other contrarians envision our next crisis to be inflationary as we print more money to pay back our impossible debt burden and destroy the US dollar in the process. Who is right? Perhaps both (deflation followed by inflation) or neither…

    Ironically the few bullish picks in Harry’s newsletter have done well. Most of the bearish picks have not. So much for being a bear. The same seems to be true for the other contrarian publications to which I subscribe. Of course what has done the best for me are the stocks I have purchase using Utility Forecaster and Canadian Edge newsletters. If the financial end of the world does indeed come, at least I will likely still be earning nice dividends in these investments and my Canadian holdings will provide some level of hedging against the fall of the US dollar.

  2. avatar
    rjp Reply February 17, 2012 at 10:05 PM EST

    attended an H. Dent dinner seminar in Calgary once, I think you covered it accurately, he talked a big show, but the results didn’t materialize, only served to contribute to cynicism about “analysts” … reminds me of another forecaster who predicted gold would go up, for about 2 decades before it ever did … how well did gold future investing do then.. or random gold stock investing…? remember Adrian Day
    Now if the analysts’ discussion doesn’t discuss how the company’s stock recommendation fits with a high ROA, low capital spending, stock repurchase and dividend payout, then their recommendation is just part of the investing community noise generation lottery ticket model to investing.