Harry Dent’s Take 7/27/21 Reader Mailbag: The Coming Crash – Part 2

The interesting thing about questions is while only one person is asking a given question, it is often the case that the same issue is top of mind with other people.  Below are four more questions Harry Dent answered on 7/29/21.

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Q: My big question is, “How does this ever end?” If the governments and central banks just keep printing money and continually buying markets to prevent corrections and crashes, how will we ever crash? It seems that new stimulus always gets explained as coming from something unforeseen, but just like in 2020, the Fed saved the day with the printer.

The Fed has absolutely backed itself into a corner at this point. They raised the overnight rate something like 5 BPS last Thursday, and the market started having a large correction globally. Rates are at zero, so if we start getting a real correction, the Fed has nowhere to go—and if they raise rates, the markets will crash as well.

How do you see this ending? And, more importantly, what if they just keep this bubble floating along at elevated levels for the next 18 months? Wouldn’t the 2022 demographic cycle help support the markets?

Here’s my final question: It sounds like you are saying we’ll see a 50% crash and then a 50% rally back from that point immediately before rolling over. Is that so? I am still a bit confused as to the timing of events AFTER the first 50% crash.

A: The first crash would be around 50%, with a target of 2,100 on the S&P 500. There will be a corrective bounce from there that will retrace maybe half of that drop (but maybe not that much), so the markets will go nowhere near a new high again. Note: a 50% rally from a 50% lower point would only take you halfway back to the top. A third wave down should happen in 2022 and a final fifth wave down should happen into late 2022 or early to mid-2023. My best target is the 2009 low of 667 or so on the S&P 500, which would be a drop of 85%+, but it could go lower.

And you are right about the Fed. They and other central banks have to keep doubling down, and they did much more than that when COVID hit. That’s their dilemma now. If we don’t see a sustained, strong rebound by late this year or early next year, it will be more obvious to people how weak the underlying economy is, and then the central banks will have to print drastically more, which will start to look super desperate. They’ll just keep blowing up the bubble until it blows enough and requires enough extra money that even the town drunk can figure out that the economy is dead. After the crash, stocks won’t bounce back to new highs and financial assets will be the only thing keeping the economy growing, albeit at a feeble rate due to the wealth effect on the top 1% to 20% in income—and that 20% spends half of the money. The demographic trends will continue to stay at lifetime lows into 2023 before turning up again.

If we don’t see a crash by then, it’s going to be a different ball game, and not a good one. It’s more likely the economy will be in a “coma” for years… as we’ve seen in Japan for 30 years now. If you don’t allow your economy to rebalance and flush out bubbles in assets and bad debts, it will never really recover or go back to normal again.

To state it simply, we are on a path to “go until you blow.”. There’s no way that central banks can pull back, as the Fed tried modestly to do in 2018, and then had to go right back to a higher level of printing quickly or see a failing economy. I think that after this mammoth cocktail of monetary and fiscal stimulus since late 2019–early 2020, a 50% crash in stocks—which is precisely what the megaphone pattern predicts—will be a death blow to consumer and business confidence in the economy and in the Fed. Now, global financial assets total $525T. That is the real bubble the central banks have created. When that blows and $220T+ disappears, there won’t be any way to print enough money to make up for that!

  1. How can stocks go down when the Fed has firmly demonstrated that it is willing to print, buy securities, and grow its balance sheet ad infinitum. I know this doesn’t necessarily mean broad inflation, but surely it means asset inflation?

We had a global economic shutdown in 2020, and the Fed was able to pull stocks out of the red within a few months. Please help me understand how you think this plays out. Under what new scenario will stocks collapse, and if they do, why would the Fed plan not work?

A: There is a limit to how much you can drive stocks above what would be happening in the real economy, and that is hard to predict. I think we could get to that point if the economy shows any weakness in the aftermath of a massive stimulus program such as what we got following COVID—it might be not a recession, just a general disappointment with how long and strong the recent surge lasts after such massive stimulus. That would be a sign of rapidly diminishing returns from the something-for-nothing policies as the smart money turns against them and then the dumb money follows.

Q: What is your forecast for commodities, beyond precious metals (i.e., steel, lithium, uranium, nickel, copper)? Is this the time to get out?

A: Yes. Commodities are the only sector that has had a major downturn thus far, and it’s due for another one: what I call a C-wave down, which happens after the first A-wave down and B-wave bounce. When the economy finally falls into a deep recession or depression for a few years, commodities (especially the metals) will hit their lowest point for most, especially the metals. Gold will likely hold up a little better than silver and the other commodities you mentioned, but gold is still likely to drop to $1,000 or so.

Q: Your focus has been on the U.S. situation, but what about Europe?

A: Overall, Europe’s demographic trends are less favorable than those of North America, but the trends are skewed by countries in the north and south. The strongest countries are Norway and Sweden, which have rare Millennial generations a little larger in their peak than the Baby Boomer generation. Demographics in the U.K. are similar to those of the U.S., with MiIlennials bringing spending back to near peak Boomer levels in the future. Demographics for Southern Europe, Russia, and Eastern Europe are weaker. Trends are weakest in Greece and Italy and only slightly better in France and Spain.

European stocks are likely to fall in a manner similar to those in the U.S., although probably a little less, due to slightly lower valuations. It’s more the rebounds in the next global boom that will differ; those in the Scandinavian countries will be the strongest. The U.K. will rebound more in line with what will happen in the U.S., where the boom will not be as strong or long as it was before, from 1983 to 2007; the next U.S. rebound should go from around 2024 until 2036–2037. The rest of Europe will be in decline, as will Japan and South Korea. Their booms will underperform due to more rapid aging of their populations. Real estate prices in most of Europe (adjusted for inflation) likely will never see present levels again!

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