July 16, 2006 Break Out Report
Harry Missed Sally
Commentary on Harry
Dent's The Next Great Bubble Boom
by Marco den Ouden
first half of 2006 I read two books with opposing points of view and
reviewed them both. One of them, Bill Bonner and Addison Wiggin's
Empire of Debt, is reviewed
elsewhere. (Follow the link!) It is a very bearish book predicting all
sorts of terrible things for the US economy and preaching gold as
salvation. It is an entertaining read even though Bonner and Wiggin are
almost strident in their tone. The other, Harry Dent's supremely bullish
The Next Great Bubble Boom, is reviewed below.
To call Harry Dent
the most bullish man on the planet is an understatement. The man avers
that the Dow will hit 40,000 by the end of the decade. In his earlier
books he predicted that target would be hit by late 2008 or 2009.
Moreover, he predicts the NASDAQ will hit at least 10,000 and possibly
So how does he
account for the market crash of 2000-2002? In his latest book, The
Next Great Bubble Boom published in 2004, he argues that the crash
at the beginning of this century runs parallel to the market crash that
occurred in 1920-1921. That crash was followed by a huge boom that saw
the Dow peak in 1929, followed by the crash that was a prelude to the
Harry actually makes
an interesting argument here, comparing the technology boom to the
automotive revolution of the 1910s and 1920s. That was the tech shift of
that era and ours is similar. The crash of 1920-1921 shook out the weak
players in the automobile manufacturing sector and the companies
emerging victorious went on to new heights. Just like the crash of
2000-2002 shook out the weak Internet and tech stocks. Post-crash we saw
strong recoveries from Yahoo and eBay among others.
Itís a seductive
argument but deeply flawed. Certainly the factual evidence doesnít bear
out Harryís thesis. Instead of sallying forth to new heights, the NASDAQ
and the Dow have yet to regain their former highs. The NASDAQ, in fact,
is still down about 60% from its peak. Harry missed his sally target and
in order to reach it, the NASDAQ must now gain 50% this year and every
year for the rest of this decade to hit 10,000 by January 1, 2010.
Likely to happen? I donít think so!
And the reason why
is because Harry is essentially a one trick pony. He bases his
predictions on demographics. Harry looks at birth and death statistics
and predicts economic trends based on population trends including aging.
Everything derives from this formula. Forget about interest rates.
Theyíre derivative. So is inflation and every other factor most
economists think contribute to the health of the economy. The only one
that counts for Harry is demographics. He does pay some attention to
cycles, using the 1920-1929 cycle as a reference for his prediction of
the roaring 2000s. He even cites Robert Prechter and the Elliott
Wave Theory, using Prechterís analysis of past history to bear out his
own theories. Harry conveniently omits mentioning that Prechter himself
is currently very bearish and has been for a few years. (Prechter sees
the Dow dropping to 777.)
Beyond 2010, Harry
becomes bearish, predicting that the market will crash from its lofty
heights for a decade. The Dow will lose 75% of its value (of 35,000 or
so) and drop back below 10,000 again. This is based on his theory of a
lag time for the effects of the baby boom to be felt by the economy.
So why was Harry so
prescient with his 1992 book, The Great Boom Ahead, and so out to
lunch with his current prediction? Well, maybe he was out ten years!
Maybe, instead of the crash of 2000-2002 being a parallel to the crash
of 1920-1921 to be followed by a magnificent boom, the crash of
2000-2002 is actually a parallel to the crash of 1929. The rally of 2003
is actually a parallel to the sucker rally of late 1929 to the Spring of
1930 which saw the Dow rise 50% from 200 to 300 in six months only to
plummet to below 50 over the next few years.
See Chart of 1929
Maybe the crash he
predicts for 2010 is already upon us. Maybe we havenít seen the worst
yet. This is certainly what Bonner and Wiggin argue, though their
arguments are based on politics and economics rather than demographics.
It wasnít until 1954 that the heights reached by the Dow in 1929 were
reached again. Thatís 25 years! If the same happens, the NASDAQ will not
hit 5000 again until 2025. Maybe the truth lies somewhere in between.
proved brilliant in the 90s. Itís been a bummer so far in the 2000s.
As a book, I
couldnít read more than half of it. Where Bonner and Wiggin are
scintillating, albeit a little self-righteous and conceited, reading
Dent is like watching paint dry. Its prose is filled with enough
numbers, charts and statistics to bore anyone but a statistician or an
economist. It has its moments, particularly in the early chapters where
he lays out his general theories, but when he starts prescribing what
everyone should do over the next twenty years, even going into minutiae
on planning your childrenís university and career schedules, taxes and
even charitable giving, he loses me. Thereís enough numbers there to
choke a horse.
I do not believe you
can predict stock market trends that far ahead. Yeah, Iím not a big
follower of cycle theories. My approach has always been to look at
individual stocks, looking for revenue and earnings growth. There may be
some merit in a pure momentum approach such as that taken by Jesse
Livermore or Nicholas Darvas. But their approach was also stock-centric.
While broad theories like those presented by Dent and even by Bonner and
Wiggin are interesting, ultimately they are wrong-headed. Cherchez la
stock! Cherchez la stock! Thatís the key to market success!