The Great Crash of Late 2009-2010
...and the Next Great Depression to Follow
The Perfect Storm: Peak of Baby-Boom Spending Cycle Collides with the Oil and Commodity Bubble in Late 2009-2010
ARE YOU AWARE that we have seen long-term peaks in our stock market and economy every 40 years due to generational spending trends, as in 1929, 1968, and next around 2009? Are you aware that oil and commodity prices have seen bubbles that have peaked every 30 years, as in 1920, 1951, 1980 — and next also around late 2009? Don't these sound like the same seasons that occur every year in our weather? Why should you be any more surprised by natural cycles in our economy that peak and decline than by winter coming in December? Your life cycle goes through seasons of childhood, adolescence, young adulthood, midlife crisis, late adulthood, and retirement — a time that is expected to last about 80 years today. You make natural changes in your life and investments as you age in anticipation. Are you aware that the economy has a life cycle of about 80 years that is likely to be very different from yours and will impact your life dramatically at times? Who's the 800-pound gorilla here, you or the economy? And this is one of those times!
We have been one of the most bullish forecasters since 1988, forecasting the greatest boom in history as the largest generation, baby boomers, moved upward in a predictable spending and productivity cycle as they aged.Generations do this every forty years in modern times. How could economists miss this? We have always called for a long-term market peak and extended downturn to begin around the end of this decade —and now we are approaching that point. Boom will turn to bust and inflation will turn to deflation.We are about to move from autumnto winter in the economy's life cycle.Have you stored your nuts? Are you ready to plant your seeds for the next spring season?
We are entering the first winter season in our economy since the 1930s. Are you prepared for this to happen?
Another important long-term cycle is cresting: an oil and commodity bubble has been building since the early 2000s. Baby boomers will slow in their spending and create a slowing economy in the United States and most of the developed world from around 2010 to around 2023 regardless of this cycle — but this commodity bubble is likely to be the key "trigger" for the next great stock crash and economic downturn as demographic trends shift more slowly. Since 2007 the bubble has entered a more exponential phase.Hence it is likely to be in its final stages, despite the setback in the second half of 2008. A clocklike 29- to 30-year Commodity Cycle strongly suggests that this peak will come between late 2009 and mid-2010, just as the long baby-boom spending cycle, which started in the early 1980s, is due to peak. This bubble will be the last to peak in this bubble boom before the entire boom unravels,much as occurred in the 1930s in the United States and Europe and as occurred in Japan in the 1990s.
The perfect storm has been brewing: the collision between our long-awaited peak in baby-boom spending and the final bubble of this unprecedented bubble boom, the oil and commodity bubble. It started with the first severe crash in 2008, but that was only the appetizer. The main course will be ushered in by an equally brutal crash that is most likely to occur between mid- to late 2009 and late 2010 and take the Dow to as low as 3,800, the 1994 low where the stock bubble first began.The last phase of this bubble will likely cause stocks to resume their downtrend again between April and September 2009. Oil prices are likely to see one last extreme bubble between late 2009 and mid-2010, with prices at $180+ before the entire bubble boom,which started in late 1982 and is expected to last until around late 2009, peaks and we then enter the Next Great Depression. We will see the deflation of three great bubbles — stocks, real estate, and commodities — and the broader deleveraging of the greatest credit bubble in history.Your life is about to change for reasons outside your control. You can't change the direction of the winds, but you can reset your sails!
This next "season" in our economy will impact your life, family, business, and investments more than any other economic era in your lifetime has done. If you thought 2008 was scary, 2010 to 2012 will bring on the greatest economic and banking crisis since the early 1930s. If you think that you will be okay because your investments are spread out over a number of sectors, you are wrong — only cash and high-quality bonds will fare well in the great crash ahead. If you think real estate already saw most of its downturn in 2008, you will be shocked at how low home prices will fall in many areas.Home prices will have to drop 40% to 50% nationally to get back to fair value, not the 10% to 20% we have seen in 2008 — and that will have a devastating impact not only on the banking system but also on our government, which will have to continue to take over these mortgages and liabilities. If you think your kid or grandkid is going to get out of that expensive school you just mortgaged your house to fund and walk into a great job market and live happily ever after, you may be wrong again, at least in the next few years.
Our best rule of thumb for how low housing prices will fall in your area, given that valuations and trends are so different regionally, is this:What was your house worth at best in 2000, and at worst in 1996,when this bubble began?
Are you aware that the Japanese blue-chip stock market, the Nikkei, was down 80% from 1990 to 2003 as Japan's baby-boom generation slowed in spending ahead of ours, just as we forecast in 1988 based on generational cycles? Are you aware that real estate in the largest and most densely populated city in the world, Tokyo, has been down over 60% from 1991 to 2005? That flies in the face of the traditional argument that "they aren't making any more land and it can't go down!" The rest of the world was booming when this occurred. Japan experienced an extreme bubble in real estate and stocks ahead of the rest of the developed world. Japan was the first major country to begin to age past its prime due to declining birthrates and represents a great leading indicator for what will occur in the most affluent nations of the world as they age likewise on about a two-decade lag — despite the continued long-term boom in emerging countries such as China and India. Even China will start to age and slow about a decade from now.
The dramatic downturn in Japan in the 1990s demonstrated two important principles: bubbles always deflate once they go to extremes, and trends can undergo extreme change when a generation peaks in its spending and productivity levels.More extreme trends will hit the United States and Western world just ahead, and this will change your life, your business, and your investments — including the prospects for your kids' education and careers — more than at any other time during your life.
In The Great Boom Ahead, in late 1992, we said, "Get ready for the greatest boom in history." Now we are saying, "Get ready for the Next Great Depression." We expect to see a once-in-a-lifetime "going out of business sale" on financial assets that will wipe out wealth for most but create new wealth opportunities for the few who see this coming and are liquid and financially sound enough to take advantage.
The people who are paradoxically most at risk are the ones who gained so much in this bubble boom: the top 1% to 10%, not just the everyday people who will lose their jobs as unemployment approaches 12% to 15% and possibly higher between early 2011 and mid-2013. Tax rates will rise dramatically as the economy fails, government revenues fall, and social expenditures to support everyday people rise. The government will have no choice but to raise taxes on the affluent and businesses, as it did from 1932 into 1946. The great depression originally forecast by a number of bestselling authors for the 1990s will finally happen in the 2010s. The only good news is that the economy ultimately will be buoyed by strong long-term growth trends in emerging countries, especially in Asia, which will create great buying opportunities for many investments in the years ahead — and lower living costs from the deflationary trends.
The Next Great Crash: Mid- to Late 2009 into Late 2010
Most investors thought after the crash of 2000-2002 that we would return to more normal markets.We forecast that this would not be the case. In late 2002 we predicted in our newsletter another bubble in stocks into the late 2000s and an extended crash and downturn to follow from the very early 2010s into the early 2020s. In fact, in The Great Boom Ahead, in late 1992,we forecast on page 16: "The next great depression will be from 2008 to 2023."We expected the recent stock bubble to be stronger in the United States at first; thus we revised those forecasts in 2006 for adverse geopolitical trends and the rising oil and commodity bubble (Chapter 3). That next stock bubble did occur in Asia and emerging markets, and it has been even more extreme than the tech bubble.
George Soros made an insightful comment in early 2008, saying that "this is the end of an era.
The greatest credit bubble in history started to deflate into 2008, but that was only the appetizer.We think the greatest bubble boom in history will deflate much more between 2010 and 2012 (and perhaps into 2014 or early 2015), or the main course. This process will continue off and on into the early 2020s, much as happened during the Great Depression from 1930 to 1942. Even then, stocks put in a long-term bottom in mid-1932, as did home prices in 1933. In the coming depression, this deflation will be devastating to the economy and to almost all financial assets, from stocks to real estate to commodities.However, great investment opportunities will be available early in the cycle and a significant bear market rally is likely between mid-2012 and mid-2017,much as occurred in the 1930s between mid-1932 and early 1937 (see Chapters 4 and 8).
Investors should hold stocks for a likely substantial rebound in 2009 to between 9,800 and 11,800 on the Dow, and should be able to continue to profit from commodity and oil stocks into as late as early to mid-2010. But the only place to hide at first will be in safe money markets and currencies (like the Swiss franc) and then, on a lag, high-quality U.S. Treasury, municipal, and corporate bonds and similar high-quality bonds of more stable economies in Asia and Europe (as we will cover in Chapter 4 and Chapter 8).Unprecedented buying opportunities will follow, especially in areas such as Asia, health care, and select areas of real estate between late 2010 and mid- to late 2012. Favorable demographic trends will continue in these areas for decades to come, well before the next concerted long-term global boom and bull market begins, between 2020 and 2023, based on demographic trends.
The Three Bears: Real Estate, Commodities, and Stocks
This unprecedented boom has seen three major bubbles develop: first, the technology bubble that peaked in early 2000; second, the housing bubble that peaked in 2005-2006; and third, the oil and commodity bubble, due to peak between late 2009 and mid-2010. Our theme since 2006 has been that the economy would experience bubble after bubble until the entire bubble boom ends. Vast amounts of money leveraged by borrowing have flowed from sector to sector through hedge funds and institutional investors.Now there is nowhere else for it to go. The commodity bubble works against the others by raising costs and interest rates. The three bubbles become "the three bears," since they will have to deflate and will do so together in the coming years, creating an unavoidable depression in the economy and in the banking system that lent so much money against these assets, especially real estate.
When it comes to stocks, the truth is that we have been in a bubble boom since the early 1980s, when the massive baby-boom generation started their family and career cycle and spending spree. Figure 1.1 shows how stock prices in the United States have followed the baby-boom birth chart (adjusted for immigration) on a 44- to 48-year lag for their documented peak in spending over time since the early 1950s. The first stock bubble peaked in 1987. A greater bubble occurred from 1995 to early 2000. The final and most recent bubble in stocks has seen even greater advances in emerging markets such as China, Brazil, India, and Russia, while stocks in the United States have seen a more normal bull market — as money flows have rushed overseas to the next bubble. In Chapter 2, we will look at the generational and technology cycles that have been driving the greatest bull market in history and why those trends point downward after 2009.We will look at global demographic trends, which are very different and much more bullish in emerging countries, in Chapter 6.
Just as the technology stock bubble peaked in early 2000, money started flowing into the next great bubble: housing. Baby boomers were moving predictably into their peak home-buying years and interest rates were extremely low due to the 2001 recession and the Federal Reserve's reduction of short-term rates to 1% from 2003 to 2005. Baby boomers didn't just buy the largest homes and McMansions; many bought one or more vacation homes, more for speculation than use — and often on "teaser" or variable rate mortgages when rates were low and falling. Immigrants were rushing to buy starter homes without an appropriate job history or credit — but who cared? Just put on the application that you have been in this job for three years, "said the spider to the fly."Housing was going up dramatically, so there seemed to be little risk, just as banks had assumed in Japan in the late 1980s. By the summer of 2005, home sales peaked, just as we had warned two years earlier in our newsletter. By 2006, home prices reached roughly double their long-term fair value, as we show in Figure 1.2, from Robert Shiller of Yale, which adjusts home prices for inflation, size, and quality of features back to the late 1800s. Home prices have since begun their greatest drop since the 1930s and will have to fall 40% to 50% to get back to reality.
The final bubble was one we missed at first. Oil and commodity prices peaked in a dramatic bubble in 1980-1981 and dropped in an equally dramatic manner in 1986, as we show in Figure 1.3. After a brief rally into 1994, oil prices dropped to their 1986 lows in 1998. Since then, a bubble in commodity prices started slowly and accelerated in 2003, exactly 30 years after a similar bubble buildup in 1973. The pullback in oil and commodity prices in the second half of 2008 convinced many that this bubble was over. Its greatest and final surge is likely to be yet ahead as the economy recovers from the 2008 recession and demand pressures build again — and an 8- to 9-year terrorist cycle raises the chance of another major attack or geopolitical crisis. Oil prices are likely to go to something like $180+ if we have a significant recovery in the second half of 2009 as we expect due to the massive stimulus plan. If the recovery is weaker, or the economy continues to spiral down, the $147 peak in July of 2008 may be at best retested. But notice clearly how each stimulus plan that follows the bursting of a bubble only feeds into speculation for the next bubble, as the tech crash and 1% interest rates by the Fed helped create the housing bubble and complex derivatives that caused the subprime crisis and banking meltdown in 2008.
These successive bubbles have been able to continue to develop as long as rising baby-boom spending, low interest rates, and growing credit availability were favorable. Interest rates will rise again and will go higher in 2009 as the economy recovers from the recent recession. Credit availability has clearly contracted since late 2007. By 2010, baby-boom spending will finally slow for the long term. The final trigger will be oil prices around $200+ and runaway food prices, which will hurt booming emerging countries the most because they are more much sensitive to commodity prices.
The perfect storm saw its first wave hit in 2008, likely continuing into mid-2009. Then we are likely to see "the eye" or calm before the real storm, which should hit much harder between late 2009 and late 2010 with major damage continuing into 2012 or a bit later. The bubbles of the three bears — real estate, stocks, and commodities — will deflate more fully. The strains on the banking system will make 2008 look like a tea party.
Late 2007 to 2008: The Beginning of the End
We started warning in our January 2008 newsletter that the markets looked as if they might have peaked a year ahead of our forecasts for late 2008 to early 2009. We have also been expecting the stock markets to bounce substantially into around mid-2009 as a recovery is anticipated, but before inflation, interest rates, and commodities rise strongly to thwart stocks again. The recovery is likely to continue on about a 12-month lag from the stimulus from late 2008 into early 2009 into early to mid-2010. Oil and much higher mortgage rates will be the wrecking balls as stocks likely start to fall again somewhere between April and September of 2009 and accelerate down into mid- to late 2010. Emerging countries will resurge as well, but also with ominous inflation trends from overexpansion. The most important trends in 2009 will be rising inflation caused by demographic trends in workforce entry, as we predicted back in 2007 in our newsletter (and as we cover in Chapter 2), and a final extreme surge and bubble in commodity and oil prices (see Chapter 3).
Hence the stock market will start to weaken again by sometime in 2009, likely between April and September 2009. Home prices naturally would be set to rise again in 2009 after the slowdown from late 2005 into mid-2009 as excess inventories increasingly were worked off. However, sharply rising mortgage rates (short term and long term) are likely to curb such a comeback after a brief rebound in sales and prices into spring or summer of 2009 with help from the Treasury bail-out plan. We have been advising our newsletter subscribers to sell unnecessary real estate by the spring of 2009, or at the very latest, the early fall of 2009. The next great crash in stocks, which will signify the end of this great bubble boom, finally will occur between mid- to late 2009 and late 2010. Housing will see a crash that most would find unthinkable and which is likely to last for a few years, at least between mid-2011 to 2013, and possibly early 2015 in larger homes or McMansions, which have peaked in generational demand for a long time to come.
Between mid- to late 2009 and late 2010, we predict the next dramatic stock crash, led by emerging markets,Asian stocks, financial stocks, and tech stocks — and, finally, by oil and commodity stocks. This crash could continue off and on into mid- to late 2012, and even possibly into late 2014. Bubble booms like this one typically come only every 60 to 80 years, and they always end badly! However, this is a rare bubble boom, wherein all major asset categories peak in similar time frames and decline into the coming decade.
Of course, we are still bullish long term due to global demographic trends and technological progress, well into this next century as your kids grow up.Much growth is yet to come from emerging countries with large populations around the world — such as China, India, Indonesia, and, ultimately, the Middle East, Latin America, and Africa — although China will not grow for as long as most people expect, due to its rapidly aging population and deteriorating environment.Many such countries may not fully catch up to affluent Western standards of living (see Chapter 6) as isolated areas such as Japan, Hong Kong, Singapore, and South Korea have done.
These emerging countries tend to have high export exposure in their most profitable industries to the more affluent and developed Western countries, the economies of which will be slowing down over the coming decade. Hence the emerging countries will experience setbacks at first, although the effect will be much less in countries like India, which have much lower export exposure. But the commodity bubble that is due to peak by late 2009 to mid-2010 will force a slowdown in emerging countries that depend to a greater extent than the United States on food and energy prices, and the bubble will continue to hit the many third-world countries in Africa, the Middle East, and Latin America that are large commodity exporters off and on for over a decade to come.
More important, stock market bubbles have emerged in the most progressive emerging countries from 2002 into late 2007 and should strongly rebound into 2009. These stock market bubbles have begun to burst,much as the tech bubble did in 2000, but the worst is likely to come between mid- to late 2009 and late 2010,much as occurred with the tech bubble here between late 2000 and late 2001. Asia should be the greatest area for reinvestment after the crash into late 2010, due to continued strong demographic and productivity trends, but only after that crash occurs around the world. The strong cash position of China and many Asian nations (as well as many in the Middle East and Latin America) with strong trade surpluses should put them in a position to end up bailing out the U.S. and many European nations, with major benefits from those economies negotiated by them well into the future. This will only raise the financial status of countries like China. The best health-care sectors in the Western world also should represent opportunities due to the aging of the massive baby-boom generation, as will retirement and vacation areas in real estate and services — along with affordable apartments and starter homes for the coming echo-boom generation (as we will cover in Chapters 4 and 8).
The Great Depression of the 1930s saw an extreme bubble in technology trends and stocks but not a significant bubble in real estate. Commodity prices bubbled and peaked in late 1919 to early 1920 and first deflated well before the Roaring Twenties bubble in stocks from 1925 into 1929. That commodity bubble continued to deflate into the early 1930s, as did real estate prices, due to the extreme downturn and deflationary trends. However, that depression revolved more around the bursting of the great technology bubble in stocks. This time around, the tech bubble peaked earlier in 2000 and has already deflated to a great degree but will deflate more in the great crash ahead. Housing began to deflate in 2007 and 2008 and will continue to deflate much more. The commodity bubble will be the greatest to deflate for many years ahead, as it will likely just be peaking between late 2009 and mid-2010.
The 1870s depression saw the peak of a great bubble in railroads (technology) in 1872, but there had been much smaller bubbles in commodity prices, which peaked in 1864, and in real estate. The previous depression of the 1840s was the one that saw a massive real estate boom in the United States from midwestern expansion (and strong government sales of land at bargain prices, which fostered high speculation and borrowing), which coincided with a peak in commodity prices on our 29- to 30-year cycle and a more minor canal and railroad bubble in technology. The extended off-and-on stock downturn from 1835 to 1857 was the worst in modern history prior to 1929-1942, and this one will be somewhat similar. It will likely be a bit worse than in the 1840s and not as severe as in the 1930s. But it will likely go down as another "great depression." The next such depression is likely to hit our grandkids and emerging countries like India between the late 2060s and the mid- to late 2070s, and it should be worse than this one, more like in the 1930s.
The lesson from past bubble booms is that they always end in depressions due to the massive loan write-offs at banks as all assets deflate. This depression will lead to major declines at first in all major investment categories — but not in high-quality long-term bonds, short-term fixed income, and basic infrastructures such as water, wastewater, health care, and transportation.Hence traditional asset allocation models that diversify into many asset classes will fail miserably, as we have been warning for decades!
The Last Forecast Great Depression of the 1990s — That Wasn't!
Many highly respected economists and historians predicted the next "great depression" for the 1990s after the first bubble in stocks into 1987-1990. The bestselling books in 1989-1992 included The Great Depression of 1990, by Ravi Batra; The Great Reckoning,, by James Dale Davidson; and Bankruptcy 1995, by Harry E. Figgie. Robert Prechter, one of our favorite long-term forecasters and historians, also predicted a long-term peak in stock markets in late 1989. These people were dead wrong! However, they understood much more about long-term economic cycles than do most respected economists today.We instead stood virtually alone in forecasting that the greatest boom in U.S. history would emerge with Japan slowing down for over a decade. These forecasts were made first in Our Power to Predict in 1989 and then in The Great Boom Ahead in late 1992.
Why did we make these forecasts? We saw the massive spending and productivity trends of the baby-boom generation in the United States and around the world — with Japan being the exception in such demographic trends. In 1988-1989 we forecast a 12- to 14-year downturn in Japan that would start around 1990. We also foresaw the next technology revolution that would occur as information technologies moved mainstream from the mid-1990s into the late 2000s, similar to the auto/electricity/phone/radio revolution from 1914 to 1929. In the late 1980s and very early 1990s, we could not know that it would be the Internet and then broadband technologies that would drive that massive productivity trend; however, such a cycle was due, according to historical trends.
Most of the forecasters of a depression for the 1990s were following a 58- to 60-year Kondratieff Wave Cycle that had been pretty consistent since the late 1700s, but they missed the rising, new 40-year Generation Wave, as middle-class consumers gained more spending and economic power from the maturation of the Industrial Revolution from the early to mid-1900s onward. The massive baby-boom generation amplified that new cycle. The Generation Wave Cycle has currently shifted to a 40-year boom/bust cycle and an 80-year New Economy Cycle.
We discuss this new Generation Wave Cycle versus the Kondratieff Cycle in greater depth on our website; go to "Free Downloads" at www.hsdent.com and download "The Long Wave." But for now we can also forecast that it is likely that this 58- to 60-year Kondratieff Cycle will resurge and dominate again in the coming decades and beyond,when we take more global demographic cycles into account, as it is simply a derivation of the 29- to 30-year Commodity Cycle we have already referred to. Even after the surprising boom in the 1990s that we forecast based on demographic and technology trends, most forecasters thought that the great boom-and-bull market was over after the crash of 2000-2002. However, we gave the strongest buy signal in the history of our newsletter (which started in 1989) in October 2002. Since then, the Nasdaq almost tripled into late 2007-2008 and the Dow doubled. Emerging markets have advanced six to ten times from 2003 into 2007-2008, even greater than the technology bubble in the United States between late 1994 and early 2000. However, rising oil prices and inflationary pressures by mid-2009 forward will increasingly hurt the stock market.
We believe that rising inflationary trends from mid-2009 into late 2009 or early to mid-2010 will then reverse to an ominous deflationary trend in prices, as the economy slows and all assets deflate, as they have done after every bubble boom in history! This sudden deflation trend will be the greatest surprise ahead — and the last thing most economists and investors will expect after the inflationary resurgence and fears of "stagflation" from 2007 into 2009.
Deflation changes the investment and business strategies for success more than any season in the long-term economic cycle! No, Harvey — gold will not protect you! The lowest-risk deflation hedge will come from locking in long-term bonds at high interest rates just as or after the deflationtrend sets in. For example, you may get the chance to buy a thirty-year Treasury bond near 7% by mid-2010 and watch its yield fall to as low as 2% to 3% by early 2015 — the best bond bull market since 1980 to 1986 and 1931 and 1942.
The Federal Reserve has been in a precarious position since Ben Bernanke became the chairman in 2006. The Fed was forced, beyond its natural inflationary concerns, to aggressively lower rates from late 2007 into 2008, just as Bernanke's predecessor, Alan Greenspan, did into 2003. In 2009, it will have to go the other way and raise rates aggressively due to rising inflationary pressures, once the economy recovers from around mid-2009 forwards. This will be embarrassing for the Fed, as it knew that inflationary pressures were rising back in 2007 and remained surprisingly buoyant into the 2008 slowdown. Greenspan publicly warned of this, as did we with our inflation indicators that forecast out 2.5 years. As we move into 2009, expect the Fed to keep raising interest rates in response to rising inflationary pressures and oil and commodity prices. Rising interest rates affect stock valuations to the downside, and rising oil and commodity prices obviously are not good for stocks and earnings.
Investors should wait to sell until stocks likely rebound to at least 9,800 and perhaps as high as 11,800 in reaction to an anticipated recovery. Near 11,000 is a more likely target. Some time in mid- to late 2009 the stock market will react more violently at first — as it did between late 2000 and late 2001 — but this time it will be a reaction to runaway oil, commodity, and inflationary pressures, much as occurred in 1980 to 1981. As if that weren't enough to deal with, we are also likely to see the next dramatic terrorist attack or a major geopolitical event in the same time frame, between late 2009 and mid-2010. This could be due to peaking oil prices or, more likely, could contribute to peaking oil prices. The stock markets are likely to make their first major bottom shortly thereafter and suffer most of the damage for years to come.
The long-term slowing will come not from this crash or even from the bursting of the commodity bubble but from natural demographic and technology cycles that we have been documenting and forecasting for over two decades.
This will not by any means be the end of the emergence of this new information economy and the massive and unprecedented globalization trend, which is only just beginning on the longer-term cycles that we measure — which last from 80 years to 500 years.We reversed from an innovation-intensive, inflationary/recessionary economy between 1968 and 1982 to a booming, low-inflation economy from 1983 into 2009 accompanied by an acceleration of earnings and productivity from the Internet revolution (from 1994 into 2008). We call these "seasons" in a modern-day 80-year cycle, and they are much like our annual seasons in weather.
Similar trends drove the bubble boom from 1914 to 1929, when the last technological revolution was moving rapidly into the mainstream and the Henry Ford generation was moving into its peak spending years. Since the crash of 2000-2002, we have seen more mixed signals, with continued strong productivity and earnings growth in companies but modestly rising inflationary pressures, slowing GDP growth, an oil-and-commodity bubble, rising geopolitical risks, and more attractive markets overseas.
The biggest factor limiting stock gains has been the increasingly adverse Geopolitical Cycle from 2001 onward, in which markets sensed greater risks, especially in the United States — and oil and commodity prices rose dramatically on a recurring 29- to 30-year Commodity Cycle, especially in U.S. dollars, given that the dollar declined substantially into mid-2008 and is likely to decline again into 2010-2012. In the early part of the coming decade we are likely to see a bull market on the dollar for many years, as well as in stocks and bonds before we see the second milder stage of the Next Great Depression between mid-2017 and early 2020 or 2023.
The 80-Year New Economy Cycle and Bubble Booms
To summarize more completely, we are at the peak of the most dynamic boom that occurs in a modern-day 80-Year New Economy Cycle, which occurs over two 40-year generational boom and bust cycles. Bubble booms like this one follow the Innovation Season, as occurred in the 1970s and in the late 1800s, in which radical new technologies first emerge.We have just lived through the greatest boom in U.S. history and perhaps in world history. This boom has been driven by the predictable family spending cycle of the massive baby-boom generation here and around the world combining with the most powerful technologies in history suddenly moving mainstream. In the United States, the baby-boom generation, with rising births from 1937 into 1961, has been rising in its income, productivity, and spending since the early 1980s. The computer and information revolution that originally took hold in this generation's innovative years in the 1960s and 1970s moved mainstream on an S-curve progression from 1994 into late 2008 with the Internet revolution — accelerating productivity, company earnings, and incomes even more.
These two trends — baby-boom spending and technology acceleration on an S-curve path into the mainstream — have created one bubble after the next in a bubble boom that mirrors the early 1900s, when the Henry Ford generation was on the rise and when the auto, electricity, phone, radio, and oil revolution accelerated from 1914 to 1928, 80 years or two generations earlier. In contrast to the 1920s boom, rising oil and commodity prices and an adverse Geopolitical Cycle (Chapter 3) limited the gains in the bull market from late 2002 into late 2007 in the United States and Europe,while the next bubble that occurred naturally concentrated in emerging markets and Asia. In the early 1900s cycle, inflation and commodity trends disrupted the progress of stocks, especially between 1913 and 1919, a period that included World War I. The Roaring Twenties saw a demographic and technology boom with strong productivity and low interest rates drive the greatest short-term stock bubble in U.S. history from 1925 to 1929.
You have to look back 80 years, to 1902 through 1942, to see the same 40-year bubble boom and bust trends that we have been experiencing over the last three decades and will continue to experience for the decade ahead.We will see a peak and bust similar to what we saw between the late 1920s and the early 1930s to early 1940s — and as we more recently saw in Japan from the 1990s into the early 2000s, as its baby boom peaked two decades earlier than similar baby booms in North America and Europe.
The generational and technological revolution 80 years ago saw the same bubble boom and volatility in stocks that we are seeing in recent decades. There was a crash in 1907 — as occurred in 1987 — followed by another substantial correction into 1914, somewhat like the more minor correction that occurred into 1994. The first tech bubble occurred from 1914 into late 1919, as did a similar bubble in late 1994 to early 2000. The final bubble happened from 1925 into 1929, before the Great Depression! You have to look that far back to understand why this boom is so different from the last extended boom from 1942 to 1968, when the smaller Bob Hope generation was driving our economy with incremental (versus radical) innovations in all of the key new industries and technologies, which were originally created in the late 1800s. In the Bob Hope generation boom, stocks advanced at more like 10% to 11% on average, with the worst corrections being around 20% — unlike the extreme bubbles of 1987 and 2000, with bull market corrections of 40% plus in 1987 and 2000-2002.
In this bubble boom, the rich have been getting richer, as occurred from the late 1800s into the late 1920s, and the boom has been much more volatile. The boom from 1942 into 1968 saw a great follow-through boom, with much progress but more widespread income growth for middle-class families and suburbia, as opposed to the rich today or back in the early 1900s. Hence it was not a bubble boom like this one. Such bubble booms occur every two generations, or every 80 years in modern times (and more like every 58 to 60 years in the past), when radical new innovations create great potential progress and strong investment in new industries fueled by an entrepreneurial, rising new upper class at first.
Such bubble booms always end badly and are followed by depressions, like the ones of 1873 to 1885 and 1930 to 1942, which create massive political and business changes (such as the New Deal in the 1930s, including dramatic rises in marginal tax rates into 1946) that advance the fortunes of the everyday worker more than the fortunes of the rich. However, the spread of new technologies to the mainstream is more likely to create greater access and advantages for everyday people and broader gains in prosperity in the decades that follow a bubble boom, as occurred in the 1940s to 1960s. Again, before the early 1900s, this New Economy Cycle occurred on a 58- to 60-year cycle that was based more on technology and commodity cycles than on generational cycles. (Please see, again, "Free Downloads" at www.hsdent.com and download "The Long Wave.")
Our predictions are almost always contrary to most economists and expectations, as were our "Great Boom Ahead" predictions in the early 1990s and our "Peak of Japan" predictions in the late 1980s. But we are not optimists or pessimists or supply-side or demand-side economists or Republicans or Democrats by nature. Our predictions are based on the same sound and quantifiable logic that insurance actuaries use with a high degree of accuracy to predict, decades in advance, when people will die! We just predict the things that will happen in between birth and death — such as when people enter the workforce, get married, spend, are most productive, borrow, invest, retire, buy houses, buy potato chips, and so on.We do the same for business and technology cycles that have life cycles just like ours.We simply are making economics more of a science than an art, as we outlined in the Prologue.
Since the mid-2000s, we have been saying, "It's not that a bubble has burst, but that we are in a bubble boom — with bubble after bubble until the overall bubble boom finally peaks."We have seen a succession of bubbles peak, starting with the tech bubble in early 2000, followed by the housing bubble in late 2005, the financial stocks and the credit bubble in mid-2007, and the emerging market and Asian bubbles in late 2007, along with a second more minor tech bubble between late 2007 and mid- to late 2009. The final bubble will be in commodity and oil/energy stocks and that will likely peak between late 2009 and mid-2010.
Other Important Cycles Ahead
In 2006, when oil prices hit $78, our projected bubble-boom scenario in U.S. stocks started to diverge from our projections based on the recovery from previous crashes, which led to the bubble in the 1990s and in the 1920s. It wasn't earnings and economic growth, since those trends were tracking closely with the 1990s boom and bubble. We started noticing that it wasn't just the oil and commodity bubble that was causing stocks to lag. This time was starting to feel like the 1960s, when, despite rising demographic trends, stocks were rising more tepidly.We saw the Cuban Missile Crisis, the Kennedy assassination, the Vietnam War that we couldn't win, creeping inflation, the OPEC cartel and oil shocks, and, finally, the broader Cold War with the Soviet Union and China. The geopolitical environment became more adverse starting around the mid-1960s and continued to be so into the early 1980s. We reexamined longterm cycles and found that we seem to clearly alternate between more favorable and unfavorable geopolitical cycles every 16 to 18 years. The last favorable cycle was 1983 to 2000 and the next unfavorable one hit from 2001 and should last into as late as 2019. Stock valuations tend to be about half of what they would be in these cycles, irrespective of demographic and technology trends.
We cut in half our forecasts for the long-term peak in the Dow in 2006 when we incorporated this Geopolitical Cycle and the 29- to 30-Year Commodity Cycle. The geopolitical environment worsened in 2001 with 9/11, and it is likely to continue to worsen into the latter part of the next decade. Expect terrorism and world events to deteriorate rather than improve during this time period — especially between late 2009 and late 2010. No, George Bush, we are not likely to win the Iraq War or see peace and democracy in the Middle East!
We have also covered other key cycles in our past books, including a Decennial Cycle from Ned Davis that peaks near the end of each decade and points downward into the first two to three years of the next decade. The worst stock crashes in history have tended to occur in this downward cycle, and the greatest gains, even in long-term downturns, have tended to come in the second half of each decade. And most investors are familiar with the 4-year Presidential Cycle, which tends to see substantial corrections between late in the first year of the new presidential term into the midterm elections.
Both the Decennial Cycle and 4-Year Presidential Cycle point downward between late 2009 and late 2010, with the Decennial Cycle continuing its decline into mid-2012 and remaining modest into late 2014. All of our key long-term and intermediate cycles point downward between mid- to late 2009 and late 2010.We see this as the greatest danger period ahead in this broader crash and deflationary bubble bust.
What is critical is that you see this Next Great Depression as inevitable and necessary, especially for your kids' lives and careers well into the future.You can't prevent it any more than winter, and neither can the Federal Reserve or the next president.How would your kids ever afford a home if prices kept going up, as in the last few decades, and didn't deflate? This book will show you how to protect your wealth and to continue to grow it in the worst cycle of our lifetimes — including sheltering yourself from the great tax rise ahead. The investors and businesses that understand the difficult trends to come will make greater relative gains than in the great bubble boom. The people and businesses that have liquidity and cash flow will benefit from the "greatest sale on financial assets" in our lifetime!
We have made many bold forecasts in this chapter and will make many more in this book, but we will have to adjust some of these forecasts as things change. In the past, many who have read our books but did not subscribe to our newsletter didn't get some very important updates and changes.Hence, in the back of this book we offer the opportunity to sign up for free periodic updates by e-mail. We also offer our newsletter for much more detailed and frequent updates to our forecasts, investment strategies, and research.
As we discussed in the Prologue, we have learned that we can combine the most important cycles in our economy to make much better forecasts decades ahead, not just months or years. Our cycles have been very consistent in predicting major turning points in trends like this one ahead. But the magnitude of the boom and bust cycles is harder to predict. We are very confident that there will be greater trends to the downside between mid- to late 2009 and mid- to late 2012 and that we will see the greatest downturn since the 1930s.How far the stock market actually declines and exactly when it bottoms are harder to predict, and how our government will react is largely predictable, but not fully. Hence we encourage you to apply for our free periodic e-mail updates and to subscribe to our newsletters so that we can keep you updated over the next critical several years.
In Chapters 2 through 4, we will examine in depth the fundamental and recurring cycles that will shape the economy's and your future for decades to come — especially in the next crucial 2 to 4 years, as we move into the first great depression since the 1930s. In Chapters 5 and 6,we will look at the opportunities in the next downturn, which will come from changing regional and global demographic trends. In Chapters 7 through 9, we will look at how investment, personal, business, and political strategies will evolve to adapt and to prosper.
Let's end this chapter by summarizing the key points:
1. This great bubble boom is coming to an end. A likely economic recovery in the second half of 2009 will be quickly thwarted by major rises in inflation pressures, interest rates, and a final oil and commodity bubble.
2. The Asian and emerging stock bubbles started to peak in late 2007 and will see similar crashes by 2010.
3. The last bubble to peak will be the oil and commodity bubble, likely between late 2009 and mid-2010, triggering the next crash in stocks.
4. We are likely to see the next accelerated stock crash between mid- to late 2009 and late 2010, when most of the damage to stocks is likely to occur. That correction is likely to continue off and on into mid- to late 2012. The Dow should reach as low as 3,800.
5. We expect all asset bubbles — stocks, commodities, and real estate — to deflate; hence the only safe place is cash and money markets and then, on a lag, into the highest-quality government and corporate bonds, including international bonds, to benefit from falling interest rates and deflation.
6. Opportunities to lock in high long-term yields on bonds before interest rates fall are likely to emerge between mid-2010 and mid-2011 in different sectors from long-term Treasury to corporate to municipal bonds in that order.
7. Intermediate-term buying opportunities in Asian stocks and health care should emerge between late 2010 and mid-2012.
8. Buying opportunities in apartments/starter homes and vacation/retirement homes should emerge between mid-2011 and early 2015.
9. The businesses that are liquid and have strong cash flow will be able to buy assets and gain market share at low prices.
10. The worst of this next depression is likely to hit between mid-2010 and mid-2013, especially around early 2011, when unemployment could reach 12% to 15%, or possibly higher.
11. There will be a substantial bear market rally, likely between around mid-2012 and early to mid-2017, in which Asia and health care will have the best demographic trends behind them.
12. There will likely be a less severe downturn from around mid-2017 into early 2020 or as late as early 2023.
13. We will see the next concerted global boom from around 2023 to around 2036, with the last great long-term buying opportunity in stocks likely in late 2022.
14. China and East Asia will be slowing down just as the United States and most of the world reemerges in the early to mid-2020s. But first in the coming decade this region will likely strengthen its financial position by bailing out the U.S. and many European governments.
Note: As this book goes through final edits, there are concerns about further bank failures and a worsening economy despite the passage of the Treasury rescue plan. If the banking system continues to implode, our forecasts for a deep downturn or depression could begin in 2009, instead of 2010.We will discuss the alternative scenario at the end of Chapter 3. It is more likely that such a massive stimulus plan will bolster the economy somewhat into 2009.Copyright © 2008 by Harry S. Dent, Jr.