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From the July 16, 2006 Break Out Report

Why Harry Missed Sally
Commentary on Harry Dent's The Next Great Bubble Boom
by Marco den Ouden

In the 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 20,000.

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 great depression.

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 Crash at Lowrisk.com

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.

Harryís strategy 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!

 

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