Bruce Norris is joined this week by Harry Dent. Harry is the founder of Dent Research, and economic forecasting firm specializing in demographic trends. He has been the author of many books, most of which Bruce has read. These include The Great Boom Ahead, The Great Depression Ahead, Demographic Cliff, and The Sale of a Lifetime: How the Great Bubble Burst of 2017-2019 Can Make You Rich.
Episode Highlights
- How accurate are demographics on outcome compared to timing reports?
- What predictions did Harry make that he is the proudest of and regrets the most?
- What is the history behind global real estate bubbles, and which country saw theirs burst first?
- When looking at the dominant generation, at what age do negative things start to occur in the market?
- Which countries have both the worst demographics and worst housing bubble?
- Where should we expect things to go in the future in regards to debt and bubbles?
Episode Notes
There are three things Bruce likes about his titles. First of all, he lands on both positive and negative sides of the equation. This is unusual. Secondly, he has extreme titles. There is no doubt about his conviction or his way to escape if he is wrong. Number three, he apparently does not need anyone to agree with him. When Harry spoke at a conference, he was announced as the contrarian’s contrarian. He sees deflation instead of inflation and falling gold prices instead of rising.
Bruce said it is tough to stand in front of an audience that is polar opposite. Bruce said in the real estate world in California they are known for looking at real estate trends and writing reports about them. In 2006 he had a chance to debate in front of the California Builders Association with The California Crash. There are sometimes you just have to say what needs to be said.
Bruce said the reason he likes demographics is because they make sense to him. He can understand it is not completely inaccurate science, but it makes sense to him that there will be times during his life that he will be more likely to do some things more than others. Bruce asked about demographics and if it is more accurate on outcome than timing. Harry said the most predictable thing in economics that people do spend and earn more money, and they want to enter the workforce around age 20. This is very predictable; and with this indicator alone with a 46-year lag on the birth index in the United States and other major countries, Harry was able to predict in the late 80s that Japan was going down before they collapsed.
They would go down for over a decade, and the United States, Europe, and the rest of the world was going to have the greatest boom in history. One simple indicator saw the biggest changes in economics ever seen in our lifetime. Demographics are very powerful, and inflation follows them on a whole different indicator, more like a 20-year lag. People were seeing black swans, but these things were not unpredictable, but they were actually highly predictable. The issue is economists do not understand demographics because they are not trained in them. The average person drives our economy for reasons they can understand by understanding their own simple life cycles as they age. It is really a great thing that people can see the future when economists are saying they cannot predict what will happen after the next election or black swan event. There are no black swan events. They are predictable when things are going to turn the other way.
Bruce asked Harry what the proudest prediction was he ever made as well as the one of which he was least proud. Harry said he is more known for predicting Dow 10,000 by the late 80s, early 90s, especially after seeing the incredible bubble boom of the 1990s from the baby boomers. The best prediction was in 1989 when he said Japan was going to collapse for 12-14 years. People thought Japan was going to become the number one country in the world, overtaking the United States. Harry said the opposite since he saw their bubble boom collapsing. It was demographically impossible for Japan to overtake the United States unless they were going to have a $120,000 GDP per capita income three times what they were back then.
The worst prediction he made for which he suffered for a long time was predicting the Dow would go to $35,000 by 2007-2009. After the first bubble burst in 2002, which was predicted would happen, they would see a second bubble that was just as strong as the first one. The reason he missed this forecast and overdid it was because of 9/11. Out of that mistake and forecasting, he found two incredibly powerful new cycles. One was the geopolitical cycle that happened up and down every 35 years. Another was the 30-year commodity cycle. Both of these cycles allowed them to predict all types of things.
Harry told people they had new indicators and see the world differently from economists. When something does not go the way their best indicators say they will, he does not go into denial. Instead, he digs in and tries to see what was missed. Through this he always finds new indicators. They now have 4-5 long-term indicators that when you put together point down to the next 3-4 years. They all seem to say we will not see a Trump revival here as the trends are down, not up for 3-4 years. When they do go down, that is where they will get the sale of a lifetime like in 1932-33. It was like during the Great Depression when real estate, stocks, commodities, and everything we could have invested in was on sale at $.20-$.30 on the dollar.
Bruce told Harry it is a great title as he is trying to get something across that is a very negative outcome, but with a positive ending if you land on the right side of it. If you see it coming, which nobody will since economists and politicians are not worrying about it, you can see that cutting taxes will do nothing. Businesses and consumers have already overspent, over-borrowed, and over-expanded in the great bubble boom. We have an excess of supplies that we do not need at a time like this. We need to restructure debt like a chapter 11 reorganization for businesses. This is what government needs to do.
Somebody needs to step up say they overdid it, had a great bubble, and now we need to restructure debt to take burdens off of consumers and businesses that over-borrowed. We then need to force the banks to write down these debts instead of creating zombie banks that keep this bubble going. When that happens, people will be surprised that it will be painful like the early 1930s. However, that is the one way to take the burden off of consumers and businesses since we have too much debt.
Florida had a sale on real estate in 2008, and California had a sale where they were buying properties at 25% of what they sold. Bruce wondered why this wasn’t good enough. Harry said the government stopped the re-pricing of the bubbles and assets from happening fully. They took $13 trillion collectively, globally, and in the world economy with 0 interest rates. It was basically free money, and they stopped the reset of prices. Real estate has to go back to what Harry calls January 2000 prices, maybe even a bit lower, in order to raise the bubble. Stocks have to go back to $4-$5,000 on the Dow to raise the bubble.
This is what has happened every single time history. Bubbles go back to where they start or a bit lower. If real estate had gone down even further, we would see even greater prices with which to take advantage. Harry told everyone it is a blunt indicator but the best one since real estate is so much more buried locally and regionally. Harry asked people what their real estate was, whether it was their office or complex. Whatever they were invested in, he wondered what it was worth in January of 2000. He thinks people will be surprised to see how much downside there is left now that real estate has bounced back near its highs again to a second bubble. The same can be said for stocks. He would ask what their stocks were worth in late 1994 when that stock bubble started. There is a big downside ahead.
Bruce wanted to understand how in 2008 he would almost land on the spot where real estate was self-destructive in the sense we allowed so many people to get financing that was ridiculous. This was opposed to the demographics of that moment. You had baby boomers 8 years younger than they are now. Going forward he could see more of a case for the demographic issue, so he wondered if it was a demographic cause problem in 2008 or if it was a financial issue. Harry said it was demographic since real estate peaks ahead of the broad economy as it did in 1925 ahead of the great stock bubble burst in 1929.
The real estate peak burst in early 2006 as he warned in his newsletter. People thought he was crazy, but the real problem was not just demographics peaking as well as demand from baby boomers. It was more that we had a bubble in finance, and people could have zero down loans at very low-interest rates. The credit allowed for the average household tripled between 2000 and 2006. It was a debt bubble, and historically these always create financial asset bubbles in things like stocks, real estate, and commodities. These then burst when the debt behind them starts to collapse. This started with real estate in 2006 during the subprime crisis, and now we have a whole new level of real estate debt, stock bubbles, and things around the world that will burst.
Harry showed in his new book that there is now $300 trillion now in financial assets in loans, mortgages, stocks, and bonds around the world that have gone up another $60-$70 trillion since the last bubble. A lot of the financial assets will simply disappear, and he predicts $120 trillion will disappear from the financial markets and wealth in our world in the next 3-6 years. This will cause deflation in prices, including everything from stocks to real estate to milk and corn.
Bruce asked at what age of the dominant generation negative things start to occur. Bruce also asked him if he considers the baby boom generation the dominant generation in the United States. Harry said yes and that in the world the baby boom generation peaked first in Japan in 1996, and they have been on a downturn ever since. Theirs was actually the first bubble to burst, and nobody understood that it was demographics and not just finance. The U.S. peaked in 2007, which they predicted 20 years before it happened. In 2011, Europe had their own crisis. The world is seeing declining demographics in the wealthiest nations, and it will continue until at least the early 2020s before it turns back up again. This is when the emerging world outside of China is going to dominate growth.
We will never see growth like we did rom 1983-2007 in the United States or Europe. Demographics is causing a demographic cliff around the world from Japan to the U.S. and Europe. There is nothing Trump or anyone can do to wave a magic wand and create more jobs and change this trend. It is predictable, and all we have done is print free money to make us feel better while this is happening. This will backfire on us as well.
Bruce asked where the tipping point is. In 2006 he thought real estate could be the issue, and he does not feel this way right now. He feels like there could be an outside influence that causes all this to cascade. Bruce asked what event could be the tipping point, whether it is China or another factor. He wondered if their GDP is changing radically because of the situation they have created, or if it is something else. Harry said there are two major events, and they will not include the United States. We did lead the last downturn and were the trigger for the global debt crisis because of our subprime crisis. However, this was only a trigger and only involved four states: California, Arizona, Nevada, and Florida. It triggered a debt crisis; and this time it will be number one, Italy becoming the next Greece and the next crisis in Southern Europe.
Germany has the worst demographics of any country, and China has a real estate bubble that makes America’s look like nothing. There are massive savings, 50-75% of income in China being put into real estate, and there are 75% of stocks compared to other assets. They have a bubble and overbuilt everything in their country. It is the worst thing in history, and economists think China is the new model of state-driven capitalism. They will prove beyond a shadow of a doubt that government does not drive economies better than free market economics and then capitalism. They will collapse, but this is the last thing that will happen. Harry thinks a crisis in Italy and Europe will hit somewhere in the next several months, and this will trigger the next global debt crisis. We now have $70 trillion more in debt than we had before the last one.
Bruce saw a show on China and the ghost cities that they build. He was looking at one in particular, and it was not a rural city. He was looking at something that looked like Manhattan with high-rise condos that were $500 grand. However, when the interviewer said what the median income of the area was, Bruce could not comprehend how you would put a value on what was there. They built the high-rises where the $500 grand price tag was attached to these luxury condos, and the median income of the area was $4,000 a year.
Harry said this is what he looks at globally. He looks at real estate compared to income, and China is the most overvalued in the world. Hong Kong, even with higher incomes, is the very most overvalued, no question. China’s real estate bubble is the greatest in all of modern history, and it will be the greatest collapse. In the leading edge markets, whether San Francisco, London, Vancouver, Sydney or Singapore, it is the wealthy foreign buyers of the Chinese that are driving up the highest prices in these areas. When their bubble collapses like the Japanese did in the early 90s, it will be a sucking sound around the world. This will especially be the case in the highest priced English-speaking cities where Chinese and other immigrants send their kids to have an education and migrate.
Bruce spoke in front of an audience in San Jose to a Chinese group of investors. At the Q&A afterwards, one of the gentlemen said he had come from Beijing. He had bought $1 million and bought a home in San Jose that was now worth $2 million. He was going to hold it until it was worth $7 million. Bruce remembered thinking this was an awfully optimistic point of view. However, he remembered where he came from and how that had actually happened. What happens when you have extraordinary success is you think you are really good at it. You become really cavalier about where you spend the money because you think it will work.
Bruce said this is a scary thing, and Harry actually compares it to a crack addict. You get high when you are on a drug and it enhances your state. This is what bubbles are in stocks and real estate. You basically become delusional. People have been saying all their lives that real estate cannot go down, and Harry says from his research that it does go down and bubbles just like stocks do. When it goes down it is more painful because real estate is largely financed on mortgages and debt. Most stock and commodity purchases, on the other hand, are not. The worst downturns in history is when real estate collapses from a bubble.
This happened to a lesser degree in the 1930s; but the greatest bubble burst in the United States in history was when the Midwest and Chicago boomed because of the canal bubble in the 1820s and 30s. At this time everyone moved westward and giving away land for very low prices. The government was financing loans back then just like we do today. There was a bubble that burst and Chicago went up 44,000% in over a decade then collapsed around 97%. This is the worst thing that can happen. Harry believes real estate is the arena in which we will see the biggest drop when you adjust for mortgages.
The question is then where people can buy things they really value since everybody loves real estate. Stocks go up and down, but people love real estate since you can live in it and use it. We will see bargains and real estate like we have never seen in years prior. Tune in next week as Bruce continues his discussion with Harry Dent.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 500 podcasts in our free investor radio archive.