Economist-writer Harry S. Dent Jr.

‘Perfect Storm’ duo projects ‘rough times’ to linger into 2020s

By JOHN NORTH

A free investment seminar, ominously titled “The Perfect Storm,” drew a standing-room-only turnout of nearly 200 people on Dec. 11 at The Asheville Racquet Club in South Asheville.

With the national and international economies suffering the worst downturn since the Great Depression, investment advisors Laura McCue and Kevin Martin had advertised that the seminar’s intent was “to promote understanding of what is occurring in our economy, why it is happening and what people need to know to survive and thrive.”

McCue opened the hour-long presentation by noting that American economist and writer Harry S. Dent Jr. is a key influence on her and Martin’s investment philosophy. “The Dent Method is a long-term economic forecasting technique based on the study of and changes in the demographic trends and their impact on our economy,” according to Dent’s Web site.

Dent, born in in 1950 in Berkeley, Calif., received a bachelor’s degree from the University of South Carolina, where he graduated No.1 in his class. He later earned an MBA from the Harvard Business School as a Baker Scholar. his best-known book, “The Roaring 2000s,” appeared on the New York Times Bestseller List. His newest book is “The Great Crash Ahead” (Free Press, 2008).

Based on Dent’s works, which she said predicted that since the late 1980s the economic boom would be bigger than expected, resulting in the Roaring 2000s. Dent also predicted — accurately — the end of the boom would occur in 2002, McCue noted.

She lauded Dent for standing “virtually alone, forecasting the boom cycle,” as well as the last commodity bubble.
As a result of her studies of Dent’s methods, McCue said that in 2003, she “incorporated other tools” in her investment techniques, especially involving charts.

Fine-tuning one’s investment techniques is becoming ever-more important, she said, noting that Dent is projecting that the U.S. “will see the next Great Depression,” beginning in 2009, with hard times continuing into the 2020s. The first stage, she said, was signaled by “the deleveraging of the three bears” — an apparent reference to the demise of Bear Stearns, along with Carlyle Capital and the near-demise of Thornburg Mortgage.

“Americans will see the first and last depressions of their lifetimes,” she added.

Despite Dent’s gloom-and-doom forecasts, “there will be great investment opportunities ahead, which we will tell you about” later in the program, she asserted.

McCue then introduced Martin, who began by emphasizing that “this is, in no way, shape or form, a political forum. With that said, let’s get started.”

Martin asked, “If you’ve got a good economy, can the stock market be far behind?” He also said that, in turn, if the economy is weak, the stock market inevitably will follow it down. “It does work both ways — and that’s important to remember.”

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Investment advisors Kevin Martin (top) and Laura McCue (botom) address a standing-room-only turnout that included all ages and an even balance of men and women on Dec. 11 at The Asheville Racquet Club in South Asheville. Asheville Daily Planet Staff Photos

In addressing basic economic theory, Martin noted that “economic activity is stimulated by spending.” He then credited Dent for providing ways to predict strong and weak cycles in the economy, based on data on immigration and the adjusted birth rate.

“If people aren’t being born, there won’t be spending,” Martin noted, adding that the peak of the baby boom was from 1957 to 1961.

By taking the baby boom chart forward, Martin contended that when this demographic group reached age 14, in 1971-75, one could reliably project that potato chip sales would boom, prompting laughter from the crowd as he noted that it is well-known that 14-year-olds are capable of consuming massive volumes of chips.

Since most Americans marry between ages 22 and 30, he said retailers and others in related fields could use that data to profit from the demand for certain services that would skyrocket. Also, when they reached the age of first-time home-buyers (around age 31) in 1988, real estate salespersons could count on a business boom.

Continuing, he noted that in 2003, when many of the boomer group reached 46, an age that data shows people tend trade up their housing, Realtors again benefited; and in 2007, when many of them reached age 50, demand for health care jumped.

As shown by Dent, Martin said, “The birth index is a wealth of information.”

In turn, Martin said, “The flip side is the trough in births. During the Depression (1929-39), people didn’t have many babies.” When challenging economic times returned in the 1970s, birth rates dropped again, he noted..

As evidence by both periods, one “can expect some trouble in the future because of a dearth of spenders.”

He added, “In 2009, we started into a trough. Then, is it a surprise the markets are off? No, the spenders just aren’t there.”

What’s more, Martin said, there is “nothing politicans can really do about it.”

In returning to Dent’s research, he said that about age 47, “most Americans spend more money than at any time in their lives ... The spending wave — that’s what drives the stock market.”

However, because of birth trends, that segment of the population is shrinking and “it won’t be long before ‘09 is here — and we’ll be on this precipice” of a doom-and-gloom scenario.

Martin then asked, rhetorically, “Is economic activity specifically predictable?”

In contending that economic activity is specifically predictable, he cited, as an example, motorcyle sales, noting that people ages 45 to 50 tend to “buy motorcycles like crazy. Then (after age 50), it falls off steeply.”

Therefore, he said, “It’s not a coincidence that Harley-Davidson stock hit an all-time high in 2006 and has fallen since.

After a pause, he added, “There are other pieces to this puzzle, which we call ‘The Perfect Storm.’”

To that end, Martin addressed derivatives, which he defined as — most commonly — “credit default swaps.” In derivatives transactions, one “is not required to have money to back up the bet,” Martin said.

He also stessed that the numbers are mind-boggling — “All the trades in the derivatives market total one quadrillion dollars!” Martin prompted laughter from the crowd as he defined a “quadrillion” as a total with an incredible number of zeroes — specifcally, one thousand million million.

Derivatives, he said, “represent the biggest financial market in the world.” Martin noted that one economist termed the derivatives market “high-stakes gambling.”

In a slap at the former Federal Reserve chairman, Martin quipped, “Alan Greenspan, though, said it (the derivatives market) was OK.

In what he termed as remarkable, Martin said, “The derivatives market dwarfs the global annual gross domestic product.”

Moreover, he contended, “When the Fed was bailing out Fannie (Mae) and Freddie (Mac), it was to protect the derivatives market.”

At that point, he reiterated that “the spending wave is not working in our favor” and, as a result, “You will see the biggest credit unwinding in history.

He added that “the United States now is $53 trillion in hock (debt) — that’s  about $9 trillion less than the world’s gross domestic product,” a ratio he termed ominous.

Contrary to political rhetoric that is being bandied about, the U.S. “is just using borrowed money” to continue functioning, Martin charged.

What’s more, he said “next on the horizon is runaway inflaction,” which Martin contended, “destroys an economy.” And compounding the problem is that “people, by and large, are very short on their savings” in the U.S., he said.

“The good news ... is that no matter what’s going on out there, there will be places to put your money” that are relatively safer, including gold, currencies and market timing — getting “in and out” of stocks, using techniques from the Dent system.

Martin then turned the program back over to McCue, who smiled gamely and prompted laughter from the crowd when she said, “Now that Kevin has gotten you all depressed, I get the good part!”

In noting that many investors and advisors “got hurt in 2002, McCue said that “what we think you need is a gameplan.” to survive and prosper in today’s ever-toughening conditions,

Using a sports analogy, she said, “You’re your own quarterback, or, if you work with us, we’re your quarterback” in the investment “game.”

“Is demand going up, or is supply taking over?” she said in listing the many questions investors need to be asking and answering. “Most trades end up in the middle ... Having our charting helps keep the odds in your favor ... We also look at sector rotation.”

McCue also noted that “commodities was the best performer,” according to a study of a recent eight-year period.
As for other investment approaches, she said, “The strategic allocation portfolios haven’t even done as well as money markets. We suggest a tactical allocation portfolio — that can really improve returns.”

She also said their firm, White Oak Financial Management Inc., uses market timing — “getting in and out of the market, based on the news of the day.”

So, we’re big believers in following the right sector ... I like to think of it as a container ship. You constantly load and unload, based on what the markets are telling you.”

“That’s the way I think investing should be — not buy and hold.” She then referred to what she termed “the irrefutable law of supply and demand.”

After a pause, she asked, rhetorically, “Given what we’ve said, who wants to be in cash?”

When referencing “cash,” she said most people would assume she is referring to the money market, but that is not her reference point in today’s investing world.

“What our U.S. dollar is doing is important for what we’re doing,” McCue said. “For the last eight years, our dollar has been falling ... The dollar recently has been rising, be we think eventually” it will plummet in value over the long term.

In her firm’s investing, “We’re looking outside the United States.”

She also cited the possibilities in the commodities market, noting that “we think it probably has two years left in it.”
Other promising investments McCue cited include gold, which “has been having lower tops,” and currencies, including the buying and selling of dollars. All of the aforementioned can be purchased simply through exchange-traded funds, she added.

With a smile, she asserted, “You know, our dollar is not tied to gold anymore,” triggering some murmer in the crowd.

“We do think the stock market will be bad for an extended period of time, but not necessarily right now,” McCue said, reiterating that a severe and extended downturn will start sometime in 2009.

“Cash can hurt you if you stay there too long,” she cautioned.

She reiterated that ETFs for gold, money markets, commodities and currencies provide attractive inflation hedges for today’s troubled investor.

“Where should I go” with investments? she asked.

“We believe you can look at demographics” for the answer,” McCue said. To that end, “we think there are some opportunities in Europe — Germany, Switzerland, Spain, Portugal and Belgium, among others — “will be great places” in which to invest.

In Asia, she listed Australia, Malaysia, Singapore and Hong Kong, among others, as attractive investment options.

In Latin America, she said the best countries for investment are Argentina and Brazil.

Meanwhile, she said, “Nothing (is an attractive investment) in Africa,” while in the Middle East, “we’re only interested in Israel” for investments.

As for her firm’s investment theory, McCue reiterated, “Harry Dent has already done the research ... We’re going to look at what he says, then we’re going to look at our charts.”

In closing, she said, “I want you to know this has been a very frustrating year for us” as investors. She recommended that those in attendance “map out a course of action — and follow it.”

“The United States is in for a really rough time that probably will last until the 2020s,” McCue predicted.