Wednesday, November 22, 2006

Harry Dent Forecast

My friend Jason Tilberg has shared a new Harry Dent forecast. Now, I have to admit that I think the man is far too optimistic about a raging bull market between now and 2009. On the other hand, Dent and I agree that there is a big drop coming and we both believe that it relates to coming changes in Boomer spending habits. After years of "living for today" and spending, spending, spending, Boomers are about to get to "imagine no possessions", because that is what their financial condition will provide them in retirement. The problem is, they are going to take the economy with them.

Boomer consumption is a major driver of economic activity. Since few Boomers will be able to maintain that rate of spending in retirement (in part because their spending already exceeds their income), Boomers will dramatically reduce consumption in retirement. Future generations will not spend the same way and lower aggregate demand will result. The problem will get worse as we get deeper into the Boom.

I actually see the downturn in housing leading to reduced activity starting in 2007, with no boom, and a full on bust in full by 2008 from which there will be no recovery for a decade or more. Stalled earnings growth, or even downright lower earnings should end the rally in the markets.

But maybe Dent has a point. Much depends on Boomer behavior between now and retirement. While there is no way for most Boomers to save enough to maintain their standard of living in retirment (which means future consumption will decline in any event) but Boomers may try and avoid their fate by making major changes in spending and saving habits. Initial moves to increase savings will lead to higher asset prices, most likely in stocks. It won't be enough to prevent the inevitable, the economy simply cannot support that much consumption by non-workers, but as an investor it might be possible to ride that wave.

I continue to urge caution in investing. Downside risks are large, in spite of bullish predictions and claims that equities are cheap. They are not. Bonds are expensive - but you have to ask yourself, why is that savvy bond market so pessimistic.

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