Dent, bestselling author and financial newsletter writer, told CNBC Tuesday that he sees a stock market crash in the United States starting in the third quarter of 2013 and continuing for a year and a half.
Dent said real estate prices and stocks would plummet more than 60% by the end of 2014, or sooner, meaning the Dow Jones Industrial Average would fall below 6,000. He also said the United States would be close to bankruptcy by then.
Dent cited U.S. demographic shifts and the nation’s debt crisis as the main drivers of a crash. He said had it not been for the U.S. Federal Reserve’s recent moves to stimulate the economy, the stock market would already have collapsed.
“We call this the economy in a coma,” he said. “Basically, without these trillions of dollars of stimulus, 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.”
Dent’s Stock Market Crash Theory
This isn’t Dent’s first high-profile prediction on the economy. He’s most famous for predicting in the late 1980s that Japan, then on top of the economic world, would suffer a slowdown lasting more than a decade.
Now his theory of a “baby boomer spending wave” suggests the U.S. is heading down a dangerously similar slope.
Dent says as consumers age, they spend in patterns. When baby boomers were having kids, they spent more and the economy flourished. As those children left home, boomers spent less and less, leading to a declining economy.
This happened in Japan, where the working-age population peaked in 1995.
By 2015, Dent says the United States will see a disproportionately high number of older people and a smaller population of the younger, productive people of child-bearing age.
“So we’re never going to see real estate prices at these levels again, and we’re not going to see stocks at the level we saw in 2007 for a long time.”
Money Morning Chief Investment Strategist Keith Fitz-Gerald, who has followed the Japanese economy for decades, agrees with Dent’s theory that the United States is approaching this “demographic cliff,” but disputes Dent’s prediction that we’re heading for a stock market crash.
“Investors should be very careful with spectacular predictions like this because even though the demographic changes suggest they may happen, the timing is far from an exact science,” Fitz-Gerald said. “For example, if you look to Japan, where Dent made perhaps the most famous of his predictions, that country has defied all odds and managed to hold on for far longer than anyone thought possible, let alone probable.”
It’s good news for investors that Dent’s wild predictions don’t always come true.
In 2006 he forecast that the Dow would reach 40,000 by the late 2000s. And at the beginning of 2012, he predicted the S&P 500 would decline 30% to 50% during the year.
The S&P ended the year up 13.4%.
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