Best-selling author, outspoken economic analyst and permabear Harry Dent is adamant the world economy is on the precipice of a historically significant rebalancing that rivals the Great Depression and the Global Financial Crisis of 2007-09.
Forecasting how deep the impact will be, Mr Dent told Small Caps that he expects to see stock market declines by as much as 80% in the developed world while real-estate values, far more dislocated and region-specific are likely to fall 40-50%.
In response to critics that doubt his 80%-plus plunge in stocks and property forecast, Mr Dent explained that most commodities have already crashed by more than 70% in recent months with future oil prices turning negative earlier this year.
The self-proclaimed “demographer” explained that by assessing demographic and macro trends, investors can better forecast future events.
According to Mr Dent’s analysis, ultra-loose monetary policy in all developed countries over the past 30 years has sown the seeds of an impending financial catastrophe that eclipses all those previous.
Referring to long-term demographic changes, Mr Dent says several countries are exposed to a severe deflationary shock and worsening economic conditions including lower aggregate demand, higher unemployment, deflation – all set against a backdrop of more bankruptcies for both companies and individuals.
Australia has strong demographics but property overvalued
The outlook for Australia is mixed despite the country’s relatively strong demographic profile compared to its peers and the lowest government debt tally in the developed world.
Positive aspects include demographics and geography. However, the proportion of Australians’ net wealth derived from real estate is currently around 65%, compared to a more conservative 29% in the US and an eye-watering 75% in China.
High real-estate exposure could put Australian banks under severe strain and potentially lead to bankruptcies if house prices declined by 20%.
Mr Dent explained that Australia may not be the basket case that China is, but it has several challenges including a high reliance on consumer spending. The biggest problems in Australia are overpriced real-estate values, excessive consumer debt and an overweight banking sector with high real-estate exposure.
According to Mr Dent, by looking at spending cycles and demographic caveats such as birth rates, it is possible to gauge how economies will perform 30-50 years later when those demographic themes eventually play out.
As demographics-validated investment locations, Mr Dent said cited Australia, New Zealand, Israel, Sweden and Norway as one of the five smaller developed countries with strong demographic trends.
On the contrary, several EU states, Japan, Taiwan, China and South Korea are expected to struggle with GDP growth in the coming decade, partially due to the COVID-19 pandemic, but more importantly, because weaker demographics keep a lid of spending and sorely-needed new investment.
Japan’s economic decline
At the end of the 1980s, Japan’s economic activity had peaked with its baby-boomers ageing and savings rates skyrocketing, while the number of younger, more active market participants with higher spending preferences declined.
“Japan’s stock and property bubble burst in the early 1990s before any of us. Japan crashed in the 90s while everyone else had their greatest booms in history,” said Mr Dent.
“The size of the baby boom, which countries are affected and when – these are all predictable factors and yet economists don’t study demographics.”
One of the more pressing problems for developed economies is dovish monetary policy, which can assuage market participants in the short-term, but eventually leads to inflation and currency devaluation in the long-term.
Mr Dent explained that major developed nations such as the US have effectively become “drug-induced economies” with the drug of choice being debt, acquired via low-interest rates.
Growing debt faster than GDP eventually leads to asset bubbles and “bubbles always burst badly”.
“Every major bubble in history has been driven by excessive debt growth, asset purchases and money printing which, which is like a financial drug – you get something now, but you have to pay for it later.”
Global debt bubble to burst
Mr Dent said that several economies have no choice but to undergo a detox in the form of debt deleveraging. The last time this happened on a large scale was in 1929-32 after the Wall Street crash, but this time around is likely to be far worse due to the larger multiples involved.
“The larger the bubble, the more painful the burst,” said Mr Dent.
Interestingly, Mr Dent claims that several prominent economists and investors are underestimating the impact of unprecedented debt growth and overestimating central banks’ capacity to mitigate the consequences of financial stimulants.
Debt can be used sustainably or to conceal the underlying problems while boosting asset prices.
“Eventually, central banks will not be able to control the debt spiral because at one-point debt growth becomes exponential. I think we’re already at that point,” said Mr Dent.
COVID-19 has emerged as the most influential factor affecting all economic activity in recent months. However, the virus is not a significant factor in and of itself.
“Coronavirus is the perfect trigger for a debt-fuelled financial crisis that’s been building for years,” Mr Dent explained.
The virus has served as an ideal catalyst by accelerating debt acquisition and reducing consumer spending simultaneously.
Mr Dent said the coronavirus crisis will push most economies into a short-term recession spanning from Q2 to at least Q3 and possibly Q4 2020.
“Sometimes you have to have a recession to clean things out. This is what this is, and there’s no other way to get out of this.”
“This virus is a short-term thing, but it is the perfect shock because it is going to literally throw most economies into a short-term depression. We could see 10, 15, 20% unemployment in Q2 2020 in a lot of countries.”
Either as a sign of his confidence or his eccentricity, Mr Dent said: “We’re going into detox next year. If we do not see a major crisis that exceeds the GFC in the next two years, I’m going to quit my profession and move to Gold Coast to be a limo driver.”