Are we hurtling toward another market crash?

By David Shields

WealthMark Advisors, Inc


According to Harry Dent, bestselling author, demographics expert, financial consultant and perennial doomsayer, this summer will be one for the history books. Specifically, he predicts that, midway through 2013, we will face a huge stock market crash, the effects of which will last for up to a year and a half.

His rationale for making such a startling prediction has less to do with expansive government spending or unethical banking practices and more to do with private debt and simple demographics.

Dent’s theory, known as the baby boomer age wave theory, begins with the assumption that our spending habits peak between the ages of 45 and 54. After that, we tend to decrease our spending as we anticipate retirement. Because baby boomers were born between 1946 and 1964, the prime spending years for its oldest members were between 1991 and 2000, which might partially explain why the U.S. economy was so strong in the 90s.

In 2006, however, these same people began to reach retirement age and spend less of their money. Two short years later, the housing bubble burst, leading to what some refer to as the Great Recession. Dent calls this “going over the demographic cliff.”

That the Great Recession occurred doesn’t necessarily prove Dent’s theory, of course. It’s highly possible that the two events — the oldest baby boomers’ decrease in spending followed by the collapse of the housing market — are not causally related at all, but merely incidental.

This explanation might be satisfying if not for Japan, where something very similar happened. Starting in the mid-1990s, the Land of the Rising Sun saw a sharp rise in the percentage of their elderly population as birth rates dropped. This was followed closely by the collapse of its real estate market.

“They had a bust,” Dent said in a recent interview with CNBC. “Twenty-two years later, [Japan’s] real estate is still down over 60 percent, still drifting down. Stocks are down nearly 80 percent, not that far off their lows. They keep bubbling up and then going down to new lows.”

Here in the U.S., we’re progressively seeing more baby boomers retire and ultimately spend less money. Is this what we have to look forward to? A generation of valleys, peaks and even deeper valleys?

If Dent is right, this summer will be even bumpier than the housing collapse in 2008. Worse, real estate stocks will fall more than 60 percent, the Dow will drop below 6,000 and the U.S. will be close to bankruptcy — all by the end of 2014.
Before getting ourselves worked up in a tizzy, however, let’s remember that Harry Dent makes his living primarily as an author and pundit. Bold claims and a little fear mongering go a long way in helping books fly off store shelves.

Regardless, there’s no denying that for millions of Americans, times are tough and likely to get tougher before they improve. What can be done?

Dent refers to ours as an “economy in a coma,” one that must be continually prodded and poked to keep it moving forward. Otherwise, it remains motionless. According to him, had we not already prodded the economy with stimulus money, we would now be facing not just a recession, but a market crash equivalent to or worse than 1929.

“Basically, without these trillions of dollars of stimulus,” he said, “we would be in a downturn, in a depression, because we also have $42 trillion in private debt, the greatest debt bubble in history, and that needs to unwind.”