American author Harry Dent – whose latest book The Demographic Cliff predicts an economic downturn in the next few years – met with InvestorWeekly to discuss his work: namely, bubbles. 

“If anyone has studied bubbles more than me I want to meet them,” he said.

The bull

By his own admission, Harry S. Dent Jr. is the Vegemite of economic forecasters. People either love him or hate him. 

Sceptics have called him a doomsayer and chastised his predictions of an economic apocalypse, but his forecasts are built on years of demographic research, consumer spending habits and a career as a business consultant in the financially tempestuous 1980s. 

Yet he wasn’t always this bearish. 

“Oh yes, I was bullish,” Mr Dent said. “In the late 80s I discovered demographic indicators that would tell you where inflation is going and more importantly, spending by generations in every major country in the world,” he said.

Dent didn’t start out as an economist, a group he considered boring while an economics student at university.

“I started as an economics major in college and I didn’t like it,” he said.

“I thought economists couldn’t predict anything, they disagreed on the same data and nobody could understand them, that they were dry and never had sex.”

After switching to study business strategy at Harvard Business School, Mr Dent worked as a consultant for Fortune 100 companies before going to work with new ventures. 

“That’s where I got it,” he said.

“In the early 80s when I came along, new ventures were appealing to baby boomers starting new trends, so I was forced to study new technologies and the baby boomer generation.

“I realised that it was the biggest wave of people in history. They called it a pig moving through a python.”

He began studying demographic trends, historical data and the spending patterns of generations. 

“I was studying these trends for my clients and then in 1988 I found the spending wave and forecasted the economy 46 years in advance,” Mr Dent said.

“When the S&P 500 correlated with this 46-year life I knew why because I study demographics, and I know that the average person in the United States peaked between the ages of 46 and 49. I later found it was 46. I found it was 47 in Japan,” he said.

Based on his research, Mr Dent then made the prediction that the Japanese economy would wind back for more than a decade. He was right. 

The bear

One feather in Mr Dent’s hat was his forecast of the US economy peaking in 2007. In 2009’s The Great Depression Ahead, he predicted 2012 would see the worst turndown since the 1930s.

It would have happened, he said, were it not for government stimulus. 

“That was a curveball,” he said.

“In addition to just lowering interest rates, governments said ‘For every decline in assets, we’re just going to put money in. We’re not going to let it happen’.”

This policy means young people around the world have no chance in the future if the economy remains artificially inflated and cannot naturally reset, he said. 

In Australia, while the domestic baby boomer demographic influences everything from the housing market to superannuation to healthcare, Mr Dent sees darker clouds on the horizon. 

The China bubble

The slowdown of China’s economic growth is on everybody’s mind. 

Just last week, CBA chief economist Michael Blythe, addressing a packed room of Australian company directors, said China’s growth – currently at 7.6 per cent,  will be five per cent by 2020.

Mr Blythe then went on to list the opportunities this creates for Australian services, as reported in InvestorDaily last week.

But this is of little comfort for a man who has spent most of his life studying bubbles.

“China is the biggest bubble I have ever seen,” Mr Dent said.

“If Australia was left to its own demographics and trends, it wouldn’t have a big downturn on its horizon,” he said.

“But China is your biggest trading partner; it is the centre of this entire region, so it affects all of your other trading partners in the entire region over here.

“China is overbuilding everything, pushing uneducated people from rural areas to urban, thinking one day hopefully they become consumers, and having them build stuff for nobody…this is crazy stuff.

“It’s fine to do that at a certain rate, but they are overdoing it. Price to income ratios in Chinese major cities is 30 times income.”

By comparison, they are 10 times in Sydney and Melbourne, the same level where California peaked and the bubble burst, Mr Dent said. 

“The only cities still bubbling are cities where foreign buyers are dominant,” he said.

“I think the China bubble is going to burst. 

“I think the rich Chinese have all their money in real estate, both at home and abroad, and they are going to get hosed so bad their savings will dissipate and they are not going to be running around bidding up real estate in Australia or anywhere else.”

Australia’s future

While it might not look like it now, the rich Chinese keeping the economy going are beginning to flee, according to Mr Dent. 

A survey conducted by Bain & Company – the global management consultant Mr Dent used to work for, along with former US presidential candidate Mitt Romney – shows that 60 per cent of wealthy Chinese are planning to move out of the country. 

“You can’t have your wealthiest people dominate 50 per cent of net worth and 60 per cent of real estate,” Mr Dent said.

It will be the busting of the China bubble that causes Australian equity and property prices to collapse, not the demographic trigger, Mr Dent said.

“Japan was burst by high prices and a demographic downturn, Germany is going to be hit by that, the US bubble got triggered by demographics,” he said.

“Not for Australia – it’s your trading partners in your region. Especially China.”