Harry Dent's Outlook on Demographics, Debt, and Deflation

Exclusive Interview: Harry Dent's Outlook on Demographics, Debt, and Deflation
By Brett Owens Sep 03, 2010 3:30 pm
The demographic trend expert and economic researcher expects a major bottom in the stock market sometime around 2012 that will take out previous lows.
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So Will It Be Inflation or Deflation?

Dent cites the massive amount of private debt (estimated to be $50-100 trillion or higher) as a large pool of credit that's going to have a significant chunk written down (his debt deflation scenario is similar to Robert Prechter’s in this regard, though less extreme).

As this massive amount of bad debt floats away to “money heaven," the forces of deflation will overwhelm any amount of potential government stimulus, Dent believes. Also, with the US citizenry already quite ticked that the last stimulus didn’t do much of anything, the Federal government’s hands may be increasingly tied by voters calling for austerity measures (or at least, more responsible government spending).

Return of the Bond Vigilantes?

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
-- James Carville, political advisor to President Clinton

Even if Joe Sixpack doesn’t rise up, Dent anticipates a far more powerful force will ultimately check the government’s ebullient spending -- the bond market. During the last wave down, the bond market benefited as a “flight to safety play." Dent doesn’t see that repeating next time -- instead, he sees concerns over government debt as being a cue for the “bond vigilantes” to ride back onto American soil and enforce some level of fiscal sanity -- likely when the next stimulus package is floated out there.

He cites the speed at which the vigilantes can mobilize and drive up the rates on government debt -- like the quick spike in Greek interest rates this spring -- as an example of how fast spreads can skyrocket.

Overall, his team is projecting a potential 2% rise in 10-year yields -- which would push the 10-year yield up from 2.5% to 4.5%. Think the housing market is in trouble now? Imagine a 2% bump in mortgage rates!

Deflation Investing Strategies

“Cash is king” is Dent’s mantra today -- specifically US dollars.

Why dollars? Because the supply of dollars is going to continue to contract as debt continues to contract -- and it will contract at a much faster rate than the Fed can potentially create it.

The US dollar isn't going to crash -- it’s already crashed, says Dent. A 60% drop since 1985 is a huge move in the currency markets. Now, the deflationary period ahead will serve its purpose of restoring the value of the dollar, which is still the unchallenged world reserve currency.

He also likes bonds, but not yet. He thinks the time to buy will be if and when the bond vigilantes ride into town and bring yields up to 4.5% or so. That would be a compelling buy, that could yield 5-6% per year overall, when factoring in price appreciation. Dent forecasts that yields would then slump slowly for a long period of time -- a la Japan.