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Economic Cycle: There’s More Than One

Harry Dent | Thursday, May 29, 2014 >>

My career and research began with an understanding that the world was cyclical, not linear. So I set out to discover, understand and project the economic cycle that drives our economy.

But I quickly discovered that there are an infinite number of cycles, from the shortest term to the longest term. The key is to determine which ones have the most impact on what you’re studying and then to create a hierarchy of them. From there, you end up with a system for forecasting and making better decisions.

The first economic cycle that was clear and had proven useful was the four-season cycle of alternating inflation, booms and busts, called the Kondratieff Wave.

The second major economic cycle I discovered was the Spending Wave: a 46-year lag on the birth index, showing when the average person would have their largest impact on the economy.

It was a good thing I found that second cycle because around that time, the Kondratieff Wave went through a massive change due to the shift to middle-class economies and the massive size of the baby-boom generation.

Forecasters following the cycle alone ended up being dead wrong when they thought a depression was coming in the 1990s.

I was not one of them. In fact, I was one of the few forecasters who correctly called the boom of that decade as I could see why it would be the strongest, demographically, in history.

I was able to do this while others couldn’t because I knew the ultimate rule in the cycles’ world. That is, when your best cycles don’t anticipate a new shift, there’s another, more powerful cycle at work.

You Can’t Dodge the Forces of an Economic Cycle

The thing is, when these “curve balls” strike, most forecasters go into denial. They try to defend their existing cycles and forecasting tools rather than looking to improve their system by adding new cycles or shifting the hierarchy.

Me? I’m constantly adjusting the hierarchy of my cycles… I’m constantly looking for reasons why any given cycle doesn’t unfold as expected… because I’m more interested in helping my readers survive and prosper through the booms and busts of our economic cycle than being closed-minded and stubborn.

And that’s exactly what I did when the Roaring 2000s threw me a curve ball and my Spending Wave failed to achieve the accuracy it was once capable of.

The final demographic wave of baby boomers didn’t create as big a bull market as I was expecting… so I knew another economic cycle was at play.

After searching, I found two new indicators:

  1. The 18-year Geopolitical Cycle; and
  2. The 30-year Commodity Cycle.

Both of these new cycles followed after my Spending Wave in the hierarchy and terms of importance.

I also had a critical Decennial Cycle that Ned Davis innovated. This cycle said the worst stock and economic crashes and crises tended to come in the first two to three years of each new decade.

The next curve ball I faced was that Ned’s cycle failed to impact, as usual, from 2010 into 2012, when I expected the great crash.

So I went back to the drawing board… I dug deeper… and I found that Ned’s cycle was driven by cycles of solar radiation, which were more like eight to 13 years long, and not as clock-work like.

The last Sunspot Cycle was one of the longest recorded to date and the present one looks to be peaking now, after which it should point down into late 2019 or so. This cycle is best at pinpointing major crashes when the other broader cycles point down as well.

And that’s where I am today.

The chart below shows my macro system for projecting economic trends, with my Spending Wave most important, followed by the Geopolitical Cycle, then the Commodity Cycle, and finally the Decennial Cycle.

See larger image

These four cycles now point down at the same time, from now into late 2019. The last time that happened was from 1930 to 1934: the Great Depression.

This system of cycles now explains why we didn’t get a further crash after 2008, as I’d expected, after baby boomers slowed their spending and the global financial crisis set in.

We needed the final trigger, the downside of the Decennial Cycle that I now can time much better than Ned Davis’s broad average cycles.

That’s why I was bold enough to use the subtitle of my recent book, The Demographic Cliff: How to Survive and Prosper in the Great Deflation of 2014 – 2019. Based on my hierarchy of cycles, I believe that great crash I’d expected in 2010 to 2102 will strike within the next year, and we’ll feel the pain off-and-on for the rest of the decade.

To summarize: the key to my forecasting methods is as follows…

  • Using predictable cycles that most other forecasters aren’t aware of;
  • Identifying the most critical cycles;
  • Putting those into a hierarchy or system; and
  • Continuing to refine the cycles and the hierarchy.

Adam O’Dell does much of the same. He has an innovative system for predicting short-term trends and shifts in stocks and sectors, a whole different realm than the one I operate within. That’s why he’s the chief investment analyst at Dent Research.

I don’t fully understand his system (like I said, not my area of expertise), but I know he has indicators that others don’t… he has a hierarchy for applying them… and he is constantly refining and improving them.

Maybe that’s why his returns have beaten most other systems I’ve seen in recent years!


Harry

P.S. If you’re to survive the crisis that is about to sweep across America, you need to know why it’s coming, what will trigger it, and what you need to do to protect your family. That’s why I’ve prepared this presentation for you. Watch it now, before it’s too late.

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David Stockman Book – The Great Deformation

Harry Dent | Tuesday, April 08, 2014 >>

When I heard David Stockman had a new book out in 2013, I knew I had to read it. I plowed through it in just five days. All 718 fact-filled pages. All the many vivid and interesting stories.

I knew what he had to say in his book was important because I’ve heard his passionate comments before… on TV… and when I met him in the New York studio for Fox.

He’s worked as the budget director for Reagan… he’s worked at the highest levels of Salomon Brothers and Blackstone… he’s started his own firm… and he’s been a major private equity investor.

This is a guy worth listening to.

A man with massive real-life experience in the world of politics and high finance.

And the reason we’ve asked him to be the keynote speaker at our Irrational Economics Summit this October 16 to 18.

David couldn’t more sing my tune on the perversity of government manipulation of markets and the economy — what I call “the markets on crack” — if he tried.

David was kind enough to endorse my recent book. He said:

“I have worked at the highest levels of U.S. politics and see a disaster in the making as the government employs endless stimulus plans and bailouts that destroy the very free market capitalistic system that has made it the richest major country in the world. Harry Dent adds the reality of aging societies and slowing demographic trends to show why such reckless debt-driven policies are certain to fail.”

Thank you, David Stockman!

And I more than heartily endorse his book, as I have several times in past articles… and as I will in the months ahead… as I share with you the insights I’ve gleaned from his book.

I’ll start today with perhaps the biggest insight I got from his incredible knowledge of the history of government finance in America. That is: The underestimated effect World War I had in catapulting the U.S. into the global economy as a major new exporter.

The U.S. was an up-and-coming emerging country — much like China is today — after the American and Industrial Revolutions, and especially so as we surpassed England in GDP and began leading innovation in the late 1800s.

I’m talking about the invention of the phone from Bell to electrical innovations from Edison. Henry Ford took the lead in car manufacturing after the invention of the combustion engine in Germany. He came up with the Model T in 1907 and then the assembly line in 1914 — massive innovations long term. If any single person helped to create the new middle-class factory worker, it was Ford.

But World War I allowed the U.S. to leverage our innovations, growing production, and agricultural capacity.

Due to the war, the allies suddenly needed our production capacity in these two areas because their attentions were diverted toward their war efforts. This made us a major exporter and catapulted our growth between 1914 and 1920. We also helped to finance that war and that boosted our growing financial institutions.

I always remind my readers of the major deflationary recession that occurred from 1920 into 1921. Everyone knows about the Great Depression, but almost no one knows about the very serious downturn that preceded it by a decade.

And David gave me new insight as to why commodity prices peaked in 1920 and why such an extreme recession or mini-depression ensued.

After the war ended in 1918, European production and agricultural capacity came back on line. That created a glut in capacity, a drop in industrial and agricultural commodities, and a slowing in world trade.

That setback obviously hit the U.S. the worst. After all, we were the fastest-growing exporter at the time.

Without David’s book, I would not have gained (as quickly) that deeper understanding of events during that time. And I’ve studied history more than anyone I know.

That insight was worth more than the price of the book and the 20 hours it took of my time to read it.

So, I recommend you do the same. Read David’s book.

Even if you don’t have that much time, at least skim through it and find the sections that interest you. You won’t be disappointed.

The Great Deformation is simply the best book I have read on the history of finance and politics in America over the last century.

And don’t miss David Stockman at our IES conference this October 16 to 18.

Save the date now.


Harry

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The #1 Reason Why We’re Headed for an Economic Collapse

Inflation is like temperatures in the economy. High inflation is like the hot temperatures of summer.

Deflation is like the declining and freezing temperatures of winter. Mild inflation comes in spring and fall. Inflation is also a result of productivity.

When a new generation is entering the work force, it costs more money to train them and accommodate them, so inflation rises (but more on that another time).

This is important to note because that’s when the economy does the best – during spring and fall – because productivity rises during those seasons.

And during the challenging winter and summer seasons, we see the greatest innovations. In the winter season in particular, recession and economic collapse are the order of the day.

The baby boomer generation created a fall bubble boom from 1983 into 2007, when it moved into the workforce, adopted the information revolution into the mainstream and then peaked in its spending and productivity.

Now we’re in the winter season, where we deleverage the debt and speculation borne during the fall bubble boom. We force businesses to consolidate. To get lean and mean.

We shift market share to the long-term winners who have greater scale to bring even lower prices for consumers in the future.

One of Harry Dent’s Three Keys to Market Prediction is Cycles

Harry Dent | Tuesday, April 01, 2014 >>

I learned three crucial principles early on in my forecasting career.

The first is that the economy is a dynamic play between opposite principles.

The second is that natural, cyclical forces have an unstoppable effect on markets and economies, regardless of what we do.

I’m talking about demographic cycles, technology cycles in productivity, geopolitical cycles, commodity cycles… even natural cycles in weather and sunspots. All of these things allow us to see where the puck will move on the ice next.

And the third, possibly most important, is that objectivity is essential.

My success in calling some of the greatest changes in economic trends — changes that almost no one else saw coming — was simply thanks to my being objective… to looking for the truth, not for what I wanted to see.

If you get too caught up in the daily news, like with the recent Flight 370 coverage, you lose sight of the most obvious insights (as I described in recent articles). And that’s true for economic and market matters as well.

Take the Democrats latest efforts, for example…

Democrats are now looking to impose more regulations on the economy and markets, all because the free-market system, with the help of government stimulus, went nuts and created the greatest debt and speculation bubble in modern history.

That move would be a mistake if it went beyond some simple responses to financial policy failures.

They’re not viewing the situation objectively, especially because the top 1% to 20% has garnered most of the gains since the 1990s.

They’re not looking at the natural forces and cycles in play.

They’re taking sides instead of understanding the fundamental truth that opposites are important for growth.

They’re ignoring the fact that extreme income inequality has always marked a major bubble boom and bust.

That rising taxes on the rich and falling power always follows the bubble burst.

Do you know that the top 1% saw their share of wealth fall from near 50% to 25% between 1929 and 1975?

Do you know that their share of income fell from 20% to 8%?

All of this is the result of natural cycles of innovation, which favor the entrepreneurs and investors who take the most risks in periods of rapid change, and the emergence into the mainstream of new technologies (like in the early 1900s and from 1994 – 2008).

The inevitable shake-out that follows during the Economic Winter Season reverses that trend, reducing the inequality and bringing the middle class back.

So clearly it’s better to objectively study these more natural and fundamental cycles, and NOT the politics of “reaction” against them.

Even during boom times, when there are strong bull markets, there are always major corrections… like we saw in 1987, between 2000 and 2002, and from 2008 into early 2009.

In longer-term bear markets, there are strong rallies… like those we saw from late 1932 into early 1937, and early 2009 into early 2014.

It’s interesting to note that, since the Industrial Revolution in the late 1870s, longer-term bull markets have outweighed bear markets by about 2:1, which has compounded into the greatest bull market bubble in modern history.

But the longer we boom, the more complacent businesses, investors, and governments get. That sets us up for greater debt and asset bubbles, which become extreme… and ultimately crash and burn.

Stability leads to instability and visa-versa.

The longer and higher we boom, the greater and faster we bust. This was Minsky’s great thesis in the 1970s, and I believe he was much wiser than Keynes in the 1930s.

Keynes sowed the seeds of governments stimulating to offset downturns in the private sector. But it was the Federal Reserve that started stimulating to prevent downturns. In so doing, it created a greater period of stability, which in turn created the extreme period of instability we’ve lived through since late 2007.

In fact, the greatest depression in U.S. history followed the creation of the Fed in 1913. Its efforts to reduce volatility in the economy only created greater imbalances and hence the bubble of the 1920s and the greater bust of the 1930s.

Mark my words: The greatest bust since the 1930s is what we have to look forward to in the next six to 10 years!

The truth is that our economy thrives from the play of opposites. This is what creates energy and innovation, just like the positive and negative poles of a battery, or like men and women.

It’s not about being pro male or female… or pro republican or democratic… pro bull or bear… or even pro inequality or equality.

It’s about objectively understanding the fundamentals at play… that the battle between the opposites creates innovation and produces creative destruction. Without the ups AND downs, making money in the markets would be impossible… growing your wealth would be impossible.

What I am is pro innovation and progress.

It’s a clear, exponential, long-term trend that brings healthy payoffs to the golden goose of free market capitalism… if and when governments allow it to happen. They’re not allowing this trend to unfold at present, and that doesn’t bode well!

What we do here at Dent Research is remain objective. We help guide you through the inevitable cycles without bias, so you can survive and prosper regardless.

So, listen to us on economic cycles and trends, not the politicians, or media, or economists, or analysts. They’re almost always biased… never objective… They have too much at stake in the status quo.


Harry

P.S. Make a note on your calendar: I am holding a live Twitter event on Tuesday, April 8, from 4 p.m. to 4:45 p.m., to answer any questions you may have about my book, The Demographic Cliff. On April 8, use #democliff to ask your questions @harrydentjr.

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More Focus for You

Teresa vd Barselaar | Saturday, March 15, 2014 >>

“What have you DONE?!”

You probably noticed on Monday that we’ve made a few changes to your daily Survive & Prosper emails.

Nothing too big… and in the interest of making our research easier to digest.

There are many great elements in our daily missives, but we realized that cramming them all into one email was a disservice to you.

So we’ve uncomplicated things.

Now you can focus on what Rodney, Harry, or Adam has to tell you on the days they write. And then you can take the necessary steps to survive and prosper.

Now that’s much better!

Here’s what else we talked about at Dent Research this week…

On Monday, March 10, Harry and Rodney talked about the fact that Americans are richer now than at any point in history. Even adjusted for inflation, we recently reached a record. So where’s all the spending?

Here’s Harry and Rodney’s answer:

For years, we’ve been told that as Americans get back above water on their mortgages, and they feel a little flush from rising asset prices, they could… would… might… actually spend a few more bucks and could… would… might borrow more. Hmm. The problem with this logic is that it implies people feel compelled to spend when they have more assets. Couldn’t they feel compelled to save? That never seems to be discussed.

As the largest wave of the U.S. population hits its prime, pre-retirement saving years, we don’t expect a rush to borrow and spend. That ship sailed in the 1990s and 2000s.

These big earners are now facing a brutal retirement calculation that scares them to death. Getting old hurts more than your back; it hurts your wallet, and no one wants to outlive their cash.

Expect spending to remain subdued, frustrating pundits and economists who simply cannot understand why someone would save.

On Tuesday, March 11, Rodney talked to his Profit Strategy beta testers about government guesswork. As he wrote:

It’s amazing what passes for good news these days…

In an economy with a workforce of roughly 150 million, creating 175,000 jobs is pathetic, particularly during a so-called recovery… Not to mention these numbers are merely estimates, not hard counts of who is actually employed.

Then there’s that pesky business of how the government guesses at the number of jobs created by the businesses not surveyed…

Then Rodney explained what effect the “improvement” in the employment report could have on the market.

Also on Tuesday, Adam gave his Cycle 9 Alert subscribers two trade recommendations. One was to sell their bullish position in the SPDR S&P Regional Banks ETF (NYSE: KRE) for a small gain.

The other was to place a new bullish trade to take advantage of what Adam sees unfolding in steel. This is the second time he is making a play on steel. His first recommendation yielded 107% gains on half the position in 27 days and another 200% gain on the second half of the position just 12 days later.

And on Thursday, March 13, Harry used a real-life example to show you how to play a downturn. In fact, we’re not just talking about some profits here or there. We’re talking about extreme wealth. And really, all it takes is two things. If you missed Harry’s article on Thursday, read it here now.

That’s it for this week. Talk to you again next Saturday,

Teresa

 

Ahead of the Curve with Adam O’Dell

This Isn’t Your Average Average

Fact: Averages can be misinterpreted.

How to Play a Downturn: Lesson from an Aussie Billionaire

Harry Dent | Thursday, March 13, 2014 >>

The best thing about Hamilton Island is that it’s a real-life example of how to make extreme wealth in an economic downturn, especially a deflationary one like what I see just ahead.

My wife and I spent four days at the world class Qualia hotel on Hamilton Island before I started an intense media and speaking tour in Australia last month.

When planning the trip, I instantly picked this hotel because it had been featured as number one in the world a few years ago in Travel and Leisure magazine.

I’d been to the Great Barrier Reef twice in the early 1990s… and to Hamilton Island, which was most famous for George Harrison’s house back then.

But the island was even nicer this time around.

I’ve never seen an island where everything — the architecture, the landscaping, the harbor, the shops, the restaurants, the hotels — were so uniformly classy. There was only one old, large hotel, called the Reef View Resort.

Hamilton Island was originally planned as a major grazing project in the mid-1970s. But in the early ’80s it was turned into a resort destination, with a commercial airport, a harbor, and a resort.

Robert Oatley, who has won some prestigious ocean races, was sailing in his yacht passed the island at the turn of the century when he became impressed with the project underway.

The island was prospering when I was there in the early 1990s, but in the global recession and stock crash of 2000 to 2002, it fell into bankruptcy and the bank took back ownership.

So, in 2003, Robert Oatley bought the whole island for $150 million. In the grand scheme of things, that’s small change. Even the island’s airport was worth more than that!

But Oatley had the cash, and he knew how to play a downturn…

He put Australia on the map for world class wines, with his winery, Rosemount, the largest one in the country. He then sold that for an enormous sum. So when the Hamilton Island deal popped up, Oatley had the cash to snatch it up.

I imagine he was able to buy Hamilton Island for close to 10 cents on the dollar.

This island must now be worth $2 billion or $3 billion, at the very least.

Hamilton added a new gorgeous marina complex, hotels, shops, and very nice residential developments.

He owns the Qualia hotel, considered one of the top in the world.

He features his new winery, Robert Oatley, in all the restaurants, hotels, and stores.

He even has a hospitality school in the harbor town; what better an institution for this tourist-intensive part of Australia.

Oatley is a classic, Branson-like entrepreneur.

He started with a coffee and cocoa business in Papua New Guinea.

He was awarded the British Empire Medal by Queen Elizabeth for his contribution to the country’s economy.

Then he brought Australian wine to the world and made Shiraz famous with Rosemount.

He has cattle ranches… and now one of the top resort islands in the world.

He, like Branson, violates that old rule of sticking to your knitting. But most of all, he has the guts and the cash to jump into a bargain like Hamilton Island when he sees one.

I’ll say it again: That’s how you make extreme wealth in an economic downturn.

I’m not suggesting you rush out and buy an island. Nor am I implying that you need to have millions of dollars at your disposal.

What I am saying is that cash (and cash flow) is king… guts (and instinct) is queen… and information (like what we bring you at Dent Research) is invaluable.

Harry

The Albatross Around the Economy’s Neck

Rodney Johnson | Tuesday, March 11, 2014 >>

I finished high school in a small town back in the swamp in southern Louisiana. We had 89 people in our graduating class, and the entire school had less than 400 students.

While we missed a lot of things because of the size of the school, there were some positives.

For one, athletes got to play several sports. In fact, my best friend was a four-sport letterman. He was fast, strong, and smart, so he was a free safety in football, point guard in basketball, 2nd baseman in baseball, and a sprinter on the track team.

Now, he is simply a relic…

The government has made his achievements almost obsolete. It’s nearly impossible for kids to pursue more than one sport today and still make a high-school team… because it’s all about the money.

Scholarship money, that is… and Division 1 in particular.

My friend’s achievements come back to me as I sit in the stands and watch my daughter play volleyball. She’s not playing on a school team this time of year, because volleyball season is over. Instead, we’re at a private facility where we pay too much for her to pursue this sport outside of her school. This is the world of “travel ball.”

Like most players, our daughter tried out for more than one organization, which then ranks the players. Then some of the players are offered a spot on a team at different levels (open, regional, state, local), representing where the team will compete.

Once on a team, players practice three times a week and play in six to 10 tournaments over the course of four months. There are also optional mini-camps… but keep in mind, in sports, practice is never optional, no matter what the coach says.

When the travel season ends, it will be summer, when the girls are expected to attend at least one three-day and one week-long ball camp, and there are other “optional” opportunities to play and practice as well.

Once school starts, the girls will try out for their respective school teams during the regular fall season. In October and November, travel-ball tryouts occur and the cycle starts all over again.

This process exists for baseball, volleyball, lacrosse, and probably every other sport.

Families spend thousands of dollars every year to pay for their spot on a team, for travel to tournaments (which can be across the country), for gear, and for camps. The costs easily can reach $6,000 per year.

While some players truly do it for the love of the game, there’s a different motivation for most. It’s all about Division 1.

Parents and players have a laser-like focus on making it to the big-time: scoring a Division-1 college scholarship to top level schools, like Duke University and University of Southern Carolina.  

Everything about their pursuit of a single sport centers on the possibility of being selected to play at a great college, thereby obtaining a “free” degree.

With the cost of college outrageously high, sports scholarships are one way for kids to be able to attend pricey schools. So families do what they can to bolster their kids’ chances. The kids play all year (school and travel ball)… they go to camps… they go to all of the practices. And they focus on only one sport in order to master the skills necessary to get selected.

The years of multiple-sport lettermen are over… thanks to a larger force that’s driving everything.

It’s the force that has driven college costs outrageously high, bringing us to the point where it’s impossible for a median-income family of four to afford it.

It’s the scourge of recent graduates and potentially the albatross around the neck of the economy for years to come.

I’m talking about student loans.

Developed in the 1960s by the U.S. government, federally-backed student loans were meant to give low-income students the means to attend college. Now the majority of students are expected to borrow in order to fund their education.

Once the money tap was fully open, universities could raise their tuition and fees as much as they wanted, which is what they’ve been doing ever since. The cost of college almost didn’t matter, since there was no limit on borrowing and no credit check.

Universities had a perverse incentive to spend all they could, updating student facilities with climbing walls and Olympic pools and adding Gutenberg Bibles to their libraries, because revenue was limited only by the number of students coming in the door. If you could attract more students, you could get more cash.

The financial crisis of 2008 served as a wake-up call. The current system of borrowing heavily to finance college is being hotly debated, yet more loans are still being made.

Total student loans in the U.S. at the end of 2013 were more than $1 trillion, compared to only $680 billion for credit cards. This is up from $250 billion in 2003.

Meanwhile, recent college graduates are struggling to find jobs in their field, much less high-paying jobs with a promising future. This makes borrowing to pay for education much less attractive.

Unfortunately, most of the current conversation focuses on the symptom — high student-loan balances for graduates — instead of the cause, the high cost of a college education.

If the federal money tap was turned off, families would make much more judicious decisions about schools, which would then be more sensitive to what they charge, and hopefully bring down the costs.

The problem is that universities would not quickly adjust to the new reality. They would try to find a way to offer private loans and other means of keeping up their revenue before finally changing the way they do business.

This would leave a group of students, those now in college and those about to attend, in a quandary: how to afford to pay the old prices without access to the old money tree.

In turn, this would make Division-1 scholarships even more valuable, at least in the short term.

I hope we’ll find a way to reduce substantially the price of college, and thereby relieve some of the pressure on high-school athletes who are trying so hard to get scholarships at the expense of pursuing, or even trying, other interests.


Rodney

The Dent Index vs. the CPI

Rodney Johnson | Monday, February 24, 2014 >>

There’s an old joke about a hot air balloonist who gets lost.

He brings the balloon near to the ground and yells out to the first person he sees: “Excuse me! Can you tell me where I am?”

The man on the ground says: “Sure! You are approximately 30 feet above ground at 39.04 degrees North by 98.15 degrees West!”

The balloonist replies: “You must be an engineer. You gave me the exact information I asked for, and yet I still have no idea where I am.”

The man on the ground responds: “You must be a lawyer. You’re lost and asked me for help, which I’ve provided, and yet somehow you now blame me for your predicament.”

This joke comes to mind whenever the U.S. government releases statistics.

I’d like to know how the economy is doing but I don’t find their information useful at all.

While I didn’t get lost in a hot air balloon, I’m still baffled long after the reports have been made public. Clearly, government statistics need better reporting, so that’s exactly what we’ve done, and we’ve started with inflation.

When calculating its Consumer Price Index (CPI), the Bureau of Labor Statistics (BLS) compiles prices on thousands of items every month and then compares them with the prices of those same goods and services for the previous month.

On the face of it, this sounds pretty good. Unfortunately, digging into the details reveals problems.

The BLS includes housing in its calculation of inflation. That seems right. After all, we all live somewhere. But does the price of housing actually change for most people, month to month? Of course it doesn’t, because almost two-thirds of people own their homes. Unless they have an adjustable rate mortgage, their cost of housing doesn’t change at all.

Among the remaining people, many have long-term leases on apartments or condos. That means the percentage of people who experience a change in the price of housing during the year is quite small. Yet this component represents more than 30% of the CPI, simply because it’s a big piece of most family budgets.

Then there’s the idea that one measure of CPI applies to everyone.

Do you buy the same goods and services as your kids or parents? Or more to the point, do you spend the same amount of your monthly budget on the same items as other age groups?

Of course you don’t.

Young people tend to spend a lot more money on education expenses, while older Americans spend significantly more on pharmaceuticals. So a dramatic rise in the cost of education would affect younger Americans much more than it would affect everyone else, especially older Americans.

Yet we treat the change in the cost of these goods and services — along with everything else — as if they affect all people the same way.

It doesn’t make sense.

To address this, we’ve developed our own Dent Age-Targeted Inflation Indices to capture how different age groups spend money, and therefore, how inflation in different segments of the economy affects each group.

We start by stripping out housing, so that consumers can see how they’re actually being affected by things that fluctuate in price, like food, gasoline, heating oil, household goods, etc.

The official inflation numbers for January showed the 12-month rate at 1.56%.

Our calculation of inflation for 18 to 24 year olds was a little less than that, at 1.17%, while young families got a bigger break, with inflation running at 1.06%. The 65 and over group had the biggest jump in prices, at 1.32%.

While we’re in a period of deflation — as we are now — the changes in each group, or even the difference between the official rate and the inflation different age-groups experience, can be small.

However, when inflation does come back, it won’t be evenly spread across all categories. Just look back at the 2000s…

In the CPI basket, from 2000 through January 2014, energy surged higher by 114%, while education costs moved up by 106%. Medical costs increased by “only” 67%.

Meanwhile, the overall inflation number plodded higher by only 39%, which is really close to the move higher for housing at 38%.

Clearly, a 106% move higher in education has a dramatic effect on young people, while an almost 70% increase in medical costs hits our aging population.

The 100%+ move in energy smacks everyone.

As we move through the rest of the Economic Winter Season and then into Spring, we’ll keep track of these numbers and let you know when they’re getting too far afield from the official releases.

That way you can have the right set of facts, and useful information to boot!

Rodney

P.S. We released our Dent Index numbers last Friday. If you missed that, you can read it here.

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Ahead of the Curve with Adam O’Dell

Dr. Copper Is Still Sick

The long-time relationship between copper and the stock market ended in 2011. Commodity prices peaked that year and have fallen sharply since. Meanwhile, stocks have continued higher, unfazed by Dr. Copper’s bearish implications.

Young People Are Expensive

Harry S. Dent | Thursday, February 20, 2014 >>

My first breakthrough economic discovery was the Spending Wave in 1988. It’s a 46-year lag on births to project the peak spending of new generations, which made a lot of sense when I first discovered the correlation with the economy and stock market.

As new generations aged, earned, and spent more, the economy would rise; then it would fall when each generation saw its kids leave the nest and started saving for retirement.

My next discovery in 1989 wasn’t as obvious at first…

I observed a close correlation between workforce growth and inflation rates, as you can see in the chart, and then found that it was closest on a two-and-a-half-year lag.

See larger image

“What the hell would workforce growth have to do with inflation?” I asked myself. Then I finally got it…

While young people are the most important investment we make in the future, there’s no denying that they cost everything and produce nothing for a large chunk of their lives!

It takes around $250,000 for the average parents to raise the average kid, and that doesn’t include college. Increasingly, governments have to fund education costs for kids.

Then, when they finally enter the workforce — at age 20, on average — businesses have to invest in training them, while providing them with a workspace and the necessary equipment. It takes about two-and-a-half years for a young new worker to start to earn his employer more than he costs.

So when you have a new generation of 20-somethings entering the workforce en masse, inflation peaks about two-and-a-half years later.

Eventually, of course, those young people become highly productive, spending and borrowing until they reach age 46, on average… and driving the economy up in the process.

Those are among the two most important economic facts I’ve gleaned from all my demographics research.

Now, I understand that inflation is obviously a complex phenomenon, with many things impacting it in the short term. Things like monetary policy, oil prices, food prices, economic booms and busts, currency exchange rates (which affect import prices), and even the weather.

But that just makes it even more impressive that this one simple indicator — my inflation indicator — would correlate so well over time. It boldly proves that inflation is not “purely a monetary phenomenon,” as Milton Friedman first proclaimed.

People are the primary cause of inflation, just as they’re the primary driver of any economy. Economists and governments ultimately don’t have as much control over the economy as they like to believe.

If monetary policy is the cause of inflation, then explain why we’ve seen unprecedented money printing and falling inflation in recent years.

That said, I will admit that, like all of my fundamental, long-term indicators, there are often short-term divergences because monetary policy, oil and food prices, and currency exchange rates do have some influence on inflation.

There has been some divergence between my indicator and actual inflation since 2008. Inflation sunk more rapidly than this indicator would forecast in 2008.

And then, when my indicator suggested a bout of deflation into late 2011, we saw mild inflation instead… thanks to unprecedented money printing (QE) to fight the deflation that set in during 2008 and early 2009.

Yet I maintain that deflation is clearly the trend. Governments continue their desperate attempts to create inflation to fight deflation, but despite their massive money printing, inflation has remained very low.

But the long-term correlation between work-force growth and inflation is unbelievable… and undeniable. If any economist can show a leading indicator that correlates this well, I want to see it!

And since my indicator has been pointing up in the last two years, we could see a surprise temporary surge in inflation if the economy doesn’t slow down soon, and if the Fed tapers very slowly.

That said, it’s already pointing toward deflation again from 2015 forward. The projection is for workforce growth to slow to near zero (and, of course, much lower when unemployment spikes again during the great downturn ahead). Deflation will come in at minus 12%, if not higher.

The Fed could get whipsawed soon, and look really stupid in the next few years.

Don’t look at government policies beyond their short-term impacts. And don’t listen to clueless economists.

If you want to see trends before they occur, watch and project what people will predictably do as they age.

Harry

P.S. The best thing about my Inflation Indicator, like my Spending Wave, is that we can project workforce-growth trends decades into the future by simply combining the number of people who’ll enter the workforce (on a 20-year lag, on average) and the number of people who’ll retire on average at age 63. This is how I knew, back in 1989 already, that we would see the greatest booms in history, especially in the 1990s and into 2007. That’s how powerful this stuff is.

 
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Ahead of the Curve with Adam O’Dell

Bonds Look Due for Another Drop

Ten-year Treasury-bond yields rose sharply — in other words, bond prices fell sharply —from May to September as investors prepared for the Fed taper that never happened.

This Isn’t a Bubble… Oh, Really?!?

Harry S. Dent | Tuesday, February 18, 2014 >>

You can make all types of insights by studying human beings throughout history, but the one that stands out is that we’re predisposed to bubbles. And no matter how obvious they always are in retrospect, most people never see them when they’re happening.

Why is that?

Because we want each bubble to be real.

We want to get rich overnight, with little effort.

We want to go to heaven when we die.

So we delude ourselves into believing that there is no bubble. It’s just how life should be. And we do this every single time.

Without exception!

I just saw the movie Nebraska…

It stars Bruce Dern, who got an Oscar nomination for his role as an aging alcoholic in Billings, Montana, who gets the classic “you won a million dollars” notification in the mail (you know, the promotional scam kind?).

But Dern’s character, Woody Grant, is on his last leg in life. He just wants to believe he’s won a million dollars… that he’s finally made it… that he is a somebody.

Woody is so delusional, he begins walking the 800 miles to Nebraska (he’s too old to drive anymore). Winning that money is that important to him. After all, all he’d ever wanted, all his life, was a brand new pick-up truck so he could feel and look like a winner… he wanted it even when he was too old to drive. And that million bucks is going to help him get it.

After the police pick him up on the road, his son agrees to take him to Nebraska, despite knowing that his father has not won anything at all.

Along the way, they stop at their hometown in Hawthorne, Nebraska, where Woody becomes an instant celebrity. Everyone in the town wants desperately to believe that anyone could make it big overnight… or die and go to heaven. They want to be a part of the bubble as well…

And of course, dozens of people suddenly find some reason or other why Woody owes them money.

Only when they finally get to Lincoln, Nebraska… to the magazine company that sent Woody the flyer announcing him a winner… does he realize there is no million bucks. There is no free prize or bubble.

Touched by his father’s desperation, Dave bought him that pick-up truck anyway, and let him drive it through his hometown so Woody could have that feeling he’s so longed for. So that he could make it seem that he had actually won that money.

The bubble re-created one last time!

I tell you about this story because Dave is the Fed and those being fooled by the Fed’s actions are Woody. And all vehemently deny that we’re in a bubble. They’re absolutely delusional.

If I had a nickel for every economist or analyst that has declared that the current stock boom is not a bubble, I could die and go to heaven knowing my wife and kids would be set for life!

You don’t have to walk or drive to Lincoln, Nebraska to see the obvious. Just look at the chart below:

See larger image

Anybody with half a brain would agree that the stock market from late 1994 into early 2000 was a bubble — but only now, in retrospect. It was most extreme in the Nasdaq and Internet stocks. But even in the broader Dow, stocks gained 8,280 points in just over five years. In fact, during that time frame, stocks got to the highest valuations in P/E ratios ever… even greater than the infamous bubble in the Roaring 20s.

And this recent bull market, from March of 2009 to January of 2014, isn’t a bubble?

Really?!

Absolutely delusional.

The point gain during this latest run has been even greater, in slightly less time. It’s gone up 10,146 points in just less than five years… and it could go as high as 17,200 before it peaks just ahead, but it may peak before that.

How could anyone look at these two bull market runs (shown in the chart above) and say that we’re not in a bubble?

But it gets worse.

It’s not positive demographics and technology-adoption trends driving this bull market, as in the last two. This bubble has been entirely created by unprecedented stimulus from the Fed and central banks around the world.

Mark my words: We are about to see a bigger bubble burst than in 2008… something closer to the likes of the Great Depression.

You can prosper by simply stepping out of the way before this obvious bubble bursts, just like every other bubble in history has.

Harry

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Ahead of the Curve with Adam O’Dell

Don’t Get Crushed by This IPO

The mass media obviously has a hand in reinforcing the feedback loop that inflates bubbles and keeps them alive. Take the Bitcoin bubble as one example.


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