Economist Harry Dent was almost a lone voice in the wilderness as he predicted that by the 1990s, Japan’s economy would be in decline rather than conquering the world. Not that Dent is necessarily a doomsayer. He also predicted long before others the burst of U.S. consumer spending from the mid-1980s to the mid-2000s, when most economists saw the U.S. economy in decline.
The secret to Dent’s success is his core belief in the predictability of people’s spending habits as they age. Economists know what people will be buying at age 25, 50 and 75… and 90. This may seem blindingly obvious, and yet it was this simple demographic fact that drove the contrarian burst of consumer spending in the 1990s and 2000s that Dent had predicted. He simply overlaid his data that showed consumer spending peaking at age 46 (expensive house, dependent children with college tuitions) with population statistics, to realize that spending would start rising around 1983 and peak in 2007-2008.
The 'Great Deflation'
As far as what demographics tell us for the future, one needs to look no further than the title of Dent’s latest book, The Demographic Cliff. The world economy is about to go off a cliff and in fact has already started. Between 2014 and 2019, the bubbles will be bursting around the world, and there will be deflation as never before seen, Dent writes. Again, the core reason is simple: the peaks of boomer generation spending have crested, and it’s downhill from here until 2024 to 2026.
This “Great Deflation” comes as no surprise for Dent, who believes that global economic cycles rotate through four roughly 20-year seasons (or more specifically two 40-year boom and bust cycles). Basing his description on the work of early 20th-century Russian economist Nikolai Kondratieff, Dent describes the four seasons as follows: “a spring boom with mildly rising inflation; a summer recession with inflation rising to a longer-term peak with major wars; a fall boom with falling inflation, powerful new technologies moving into the mainstream, and a credit bubble that leads to high speculation and financial bubbles; and then finally the winter season with the bursting of the bubbles, debt deleveraging, and depression.” For Kondratieff, the seasons occurred in 60-year cycles, but longer life spans and the shift to a mass-consumption consumer society has stretched the cycle to 80 years, Dent writes. The last spring began in 1942 with the growth in spending by what Dent calls the Bob Hope generation. Which means that winter has begun.
The Demographic Cliff, however, is not intended to be just a sky-is-falling book; its subtitle is “How to Survive and Prosper during the Great Deflation.” The second half of the book is filled with how to respond to the Great Deflation. For example, finishing the book in September 2013, Dent writes that his analysis foresees a major stock market correction after the first quarter of 2014. “So you should be looking to sell stocks soon after this book comes out in early January,” Dent writes. For real estate, he suggests that baby boomers will want to buy vacation homes in 2016 or after. Dent follows up his in-depth advice for individuals with equally in-depth advice for businesses and governments — governments that must give up their monetary stimulus “drug” habit.
The Demographic Cliff is not a quick read, but it may be the best investment of time that one could make –– before it’s too late. As Dent writes, "If you see the change of season coming, it's no problem to adapt. If you don’t, you’re in trouble."