ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years, and currently owns property in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth show. This is your host Jason Hartman, and this is episode number three hundred and fifty-two. And pardon the sound quality—I will get on the headset here in just a moment. But I’m coming to you today from Jamaica! From Montego Bay. And I wanted to introduce my Jamaican friend here, this is O’Neil. O’Neil, how are you doing?
O’NEIL: I’m doing very well. Welcome to Jamaica, man.
JASON HARTMAN: Hey, that’s alright! I love that! Teach our listeners today a new Jamaican phrase, if you would.
O’NEIL: Alright. In Jamaica we always say, how you doing, right, what’s going on. So, our Jamaican phrase for today is, wagwan? So you’re like, wagwan, and that’s the best thing you can say, and they’ll be like, we’re good. It’s always bring a smile to someone’s face.
JASON HARTMAN: You know what amazes me, O’Neil? O’Neil is the butler in our villa here, and everybody here is so nice and so happy all the time. And so mellow. And everything’s like peace and love, it’s all good. Tell us about the Jamaican spirit a little bit.
O’NEIL: Actually Jamaica spirit, we have problems, but we always can fix it. but we always say, no problem. You know? So we always, it’s like, smile. Give a smile, a smile is always the key ingredient. So if we get a smile from you it’s like, a chain reaction. So we always be like, alright you smile at me, I’ll smile at you, and it’s perfect.
JASON HARTMAN: Yeah, it’s reflected in the whole culture. Like in the music, and everything, you know? Reggae music, it’s very happy. And everything is joyful and positive.
O’NEIL: Maybe this one is not fit for there, but it’s the marijuana, I must say.
JASON HARTMAN: [LAUGHTER]. By the way, I meant to ask you. Because we’re going to a rasta village today. Is that legal here? Is marijuana legal here?
O’NEIL: No, it’s not legal.
JASON HARTMAN: It’s just popular? [LAUGHTER]
O’NEIL: It’s something that gets most people through the day. It’s illegal, but you know? Jamaican police will give you a slap on the wrist.
JASON HARTMAN: So nobody really cares. And maybe I’ll ask you, and I didn’t tell you we were going to talk about this, but since we’re talking about other issues—so, Jamaica’s had quite a bit of problems lately. I watched a documentary a few years ago called Life in Debt, and it was about the political issues here, and what the World Bank did to the country—really put the country in debt. And it was really a very enlightening thing, because what they did is they made Jamaican government devalue their currency to increase the exports, and that really hurt the economy here. It hurt the people, because the value of their money declined. So they couldn’t afford to import things very much. What’s going on?
O’NEIL: That’s true. We had two separate incidents. I think back in 1980 was the first, and it was (unintelligible). And now in the new millennium, it was 2005, we had the IMF come in. And all of these times, it’s always about getting more product into Jamaica so that the local people, the local farmers, they don’t get as much sales. So less profits. So the country is solely dependent on tourism, and that’s why I’m happy you’re here. So, 75% of our population working class is actually tourism.
JASON HARTMAN: Working in the tourist industry?
O’NEIL: Yes. So, if you have that, we are totally dependent on what you think, you know? And in real life story, Jamaica really is getting better little by little, but we are so deep under, it’s going to take a long, long time to get up. So, we need as much help as we can. And I think we need change of government. Younger people, more education. Education is the key, and we don’t have that around a lot. Most Jamaicans—80% of Jamaicans—poor. So if you have 80% of your population being poor, you don’t have nothing. So that’s the key. And thank you.
JASON HARTMAN: Thank you, that’s really insightful, so thank you for doing that. I may have misspoke, it was the IMF, the International Monetary Fund, that did that. But they promised a lot of development for the country, I know that was their promise. I don’t know if they kept the promise. Highways and infrastructure and things that would help the country grow and build, but…
O’NEIL: What happened is, we haven’t met their requirements. Even though we haven’t met their requirements, so based on that, it’s not really going well for us. You know? There are so many requirements. Health, they want pension funds, a lot of things, and it’s not happening.
JASON HARTMAN: So, a lot of people say they forced the country into a default situation, and then the default terms were much worse than the loans, so it really crippled the country.
O’NEIL: Yes. It has crippled our cane produce, or bauxite was the biggest thing Jamaica had for export. And all this is like no more, based on the fact that the IMF forced us to sell what we own. So, we only have a meager 2% in our cane investment. A meager 2% in our bauxite. Our airport, and our national airline—we have Air Jamaica. Now we have sold it as Caribbean Airlines. And now all of that is just coming down. It’s like a big bird just falling. And we have to do something. It has to change. And we have the IMF, they are doing some things—they have the strong rules, so they are bringing in some money to the economy. But it’s not really doing it for the poor class. We still don’t have jobs, we still don’t have schools, we still don’t have proper health. So, this is a fight.
JASON HARTMAN: Well, I gotta say that amazingly, in the face of all those challenges, and the lack of education and healthcare and the poverty that goes on in this country, it has still amazed me, the spirit of the Jamaican people, and how friendly and how nice they are, and how happy they are, so, you talked about the secret of that…[LAUGHTER].
O’NEIL: It has a lot to do with our foreparents. They sing a lot of song, and when you have a community or a conscious singing a lot. If you walk the Jamaican street right now, 10% of the people would be walking and humming a song.
JASON HARTMAN: They really do.
O’NEIL: So we are into music. Like how we are into weed. These things. So, you have a smile consistently, and your family, you’re close to your family, so minor things may happen. It’s just a family-oriented island, so that’s why when you come we have to embrace you like family.
JASON HARTMAN: Aw. Well, thank you O’Neil. And when I asked you to come on and just teach people Jamaican phrase and say hello, I didn’t tell you we were going to talk about any of this stuff, so thank you for talking about all the political and economic stuff. That’s very amazing, I appreciate it.
O’NEIL: Thank you.
JASON HARTMAN: Well, I hope you enjoyed that. That was our butler in the villa; his name is O’Neil, and pardon the sound quality, but I didn’t have much to work with here. Anyway, you learned a little bit about Jamaica, and the background. I’m here for a business conference, and of course we’re all having a little bit of fun too. There’s about maybe 100 of us here, maybe 80 to 100. And I will be back in a couple of days, and we are trying to get our Podcast up every Tuesday and Thursday now, somewhat consistently. So that is a goal we’re going to strive for. And thank you for listening to that. Our guest today, he’s back for the third time, and that is the famous author and economist Harry Dent. So, we will have him on here in just a moment. And be sure to go to www.jasonhartman.com, check out properties, get the last several remaining tickets for our Meet the Masters event in January. And let’s go to Harry Dent. By the way, this interview was originally released in the members’ section about two months ago. We release stuff to the members first. And then we knew it would come on to the regular show, and it’s really interesting. I thought this was—of the three interviews, the three times I’ve had Harry on the show, I thought this was the most interesting interview, because he gives some really interesting insights into real estate investment, and at first when you hear him, it’s going to sound like he’s bearish on real estate. But then if you listen a little deeper to the conversation, he becomes very bullish on the right kind of real estate, and that’s what I always say: that all real estate is local, so you have to be area-agnostic. Anyway, let’s go to our guest, Harry Dent!
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JASON HARTMAN: Hey, it’s my pleasure to welcome Harry Dent back to the show! He is now a three-time guest, and his new book coming out January 7th is entitled The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019. Harry’s resume speaks for itself. He’s been doing this a long time. I first discovered his work in the mid ‘90s, and just really fell in love with the idea of predicting the economy through demographics. And there’s a lot of talk about China now, but they’ve got some problems. And we’re going to talk about all of this stuff around the globe. So, Harry Dent, welcome back. How are you?
HARRY DENT: Nice to be back, Jason.
JASON HARTMAN: Well it’s good to have you. So, you’re out with some pretty big predictions! Dow 3300, golf 750…tell us what you think.
HARRY DENT: Well, I think the big picture to get, and I don’t see why this isn’t more obvious. Every time I’m on places like CNBC, and I say, well, the Dow could go up to 16,000, 16,500, and then crash to 6,000 or a little lower. And then next to you people say, oh that’s crazy, that can’t happen. And I say, this is all that’s happened in the last couple decades! We had a bubble, the tech bubble in the early 2000s, and a big crash in late 2002, and we had the emerging markets and real estate bubble, and stock bubble, again in late 2007, and it crashed in early 2009. Every bubble has taken us higher, and every crash has taken us lower. So that’s all that projection is. If I draw a trend line through the tops in the Dow, we’re going to hit that trend line top in the next few months. A little over 16,000. And then if we go all the way down to the trend lines through the bottoms, in 2002 and 2009, we would hit a bottom of about 5800 in 2015 or so. So, it’s just more of the same! It’d be one thing if this, at least the last two bubbles were somewhat real. I mean, technologies were moving mainstream. Baby Boomers were in their sweet spot of spending. Which I was one of the few people to see in the late ‘80s, early ‘90s as well as the downturn in Japan. Because like you say, demographics predict the whole thing. And then the 2003 – 2007 boom was kind of like the last levels of Baby Boomers, last levels of technology progress, but hey! Everybody’s got cell phones and internet now. Baby Boomers keep to their spending in 2007, and then it’s taken all this massive stimulus just to keep our economy growing 2% on average. And the truth is, these stimulus cycles are seen every 7 quarters, or a little less than 2 years. We had QE1, the economy came back for 4 quarters boom, and then 3 quarters bust, and the next thing you know we were in a one quarter recession, -1.4%. Then QE2 came in. We had 3 quarters of boom, 4 quarters of bust. 7 quarters later we were back at zero growth, and that was just the 4th quarter of 2012! So, whether we taper or not—and they’re probably going to have to taper at some point—stimulus only lasts so long! Unless you up and up and up the ante, so we’ve had 2 quarters of growth, the 3rd quarter is almost certain to be good, from what we’ve seen. 4th quarter, maybe maybe not. And then the 1st 3 quarters the next year, we’re probably going to go back to zero again. So that’s not gonna be good for real estate, not gonna be good for stocks. And the Fed’ll probably start to taper here in the 3rd quarter or so, or 4th quarter. The stronger growth just in time for the cycle to drop off anyway. But there’s a lot more problems we see in the world. We see this megaphone pattern in stocks, which says we’re near a peak. The markets have gotten more and more bubbly. Real estate—we look at this as, who’s really buying? Well, it’s a lot of hedge funds, and pension funds, and individual investors. People who get mortgages for purchase—young families. That has barely bounced off the bottom. So it’s showing that real people are not buying homes. Just like everything else, the Fed’s shoving trillions of dollars into the economy, and it goes into stocks and commodities and real estate. It has to go somewhere, so it goes into speculation, and then you just get one bubble after the next peak and crash. What we think is, we’re heading for a cycle in 2014 where we’re—the whole system kind of breaks down short term again like in 2008 and 9. So, we see the greatest danger. But I think the stock market is likely to peak between mid January and late March. So I’m telling people to be cautious in that arena. And of course if stocks are starting to peak it’s a leading indicator to the economy and housing. Housing peaks and lags, so that means watch out in real estate as well. And then I think we could see the next major crash in stocks start to set in in the first couple quarters of next year. It could take a year and a half to two and a half years for that to work out. And stocks, the projection is that stocks are gonna be below 6,000 before this next crash is over. So, nothing to sit through and hold through. If stocks are down that much, then you know real estate’s gonna see another major decline as well.
JASON HARTMAN: Yeah, and I want to make the distinction too, because we talked about it, because so many of our listeners are real estate investors. Real estate in the non-linear, cyclical, high-flying bubble markets, like California, like New York, etc., that’s a different animal than it is in markets where you’re buying at or below the cost of construction that we talked about. Right? Or do you want to make some distinction there?
HARRY DENT: Yeah, I mean, stocks kind of going up and down together with about 75% correlation, even around the world. Real estate is very local and regional. Supply and demand—there’s states where people are migrating or immigrating to, that has a whole different demand pattern. There are states—
JASON HARTMAN: Texas.
HARRY DENT: Texas has endless flat land. The joke I say is, you can watch a dog run away all day in Dallas. It’s just unbelievable how—I mean, there’s no constraints on supply, so Texas never bubbles that much, with the exception of parts of Houston and downtown Austin now is a bubble, like South Beach. But—
JASON HARTMAN: Downtown Austin and those high rises are like downtown LA—
HARRY DENT: It went up with inflation! That’s what real state is supposed to do; go up with replacement costs. And inflation. So, you take from the Rocky Mountains to the Alleghany Mountains on the east coast. They weren’t bubble markets, like you say—they were more linear. The bubbles happen in coastal cities, they happened in Florida, Nevada, Arizona, California, were the biggest parts. DC, New York. And so that’s where—we always say, the greater the bubble the greater the burst. Now, people actually think the opposite. People that are in these bubble areas, and I’ve been to all of them—Tokyo, I’ve lectured a lot in California, and I’ve been to Australia a lot—I lived in Miami for three years and then moved to Tampa, right in a bubble. People in bubble areas say, real estate can’t go down here, because the supply’s so limited, and we’re so special! That’s exactly what causes the bubbles. And then bubbles go burst, because they get too expensive! Young people buy all the real estate, old people sit in it!
JASON HARTMAN: Yeah, very good point.
HARRY DENT: So when the young people can’t afford it anymore, the bubble’s over.
JASON HARTMAN: Yeah, good point. Tell us about gold. You—and I mean, the 750 prediction is a big downturn. What do you think?
HARRY DENT: Well, that’s just the next stop. I think gold could be—gold, a bubble like everything else—everything is bubbles. Like you say, this bubble real estate—I mean, you want to talk about a real estate bubble, you go look at China. Look at emerging markets. And look at London. It’s just unbelievable. There’s bubbles around the world. Emerging market, stock market bubbled and burst. China burst 70% in the last downturn. Emerging markets went down 60% on average—more than the US, and more than even Europe in some parts. So these bubbles are everywhere. Gold is a bubble! And we said in the last book, The Great Crash Ahead, that gold would probably be the last bubble to burst. Well, it kind of peaked out over 1900 and went sideways for two years, and it just keeps dropping like a rock. So I think in the next year or two, you’re gonna see 700-750 minimum. I think gold’s probably going to bounce a bit more first; it’s really been kind of oversold here. And I think down the road—we see, as the book subtitle says—2014 to 19 as kind of the difficult period where our commodity cycles are down, our geopolitical cycles, and our demographic cycles are all down at the same time. That is the danger period for the economy ahead. So, we get out 6, 7, years from now, I think gold could be back at 250. It could be that low. I think oil could be 10-20. None of these are going to stay there. That’s just a bottom. And I think this bubble real estate could go down again. I’m still renting in Tampa, Florida. I told my wife I’m not going to even think about buying until we see another downturn, and at least into some time in 2015. Then we could see the bargains of a lifetime.
JASON HARTMAN: Well, I’ve always thought that renting a high-end home and owning a lot of little cheap houses that you rent to other people was the best equation, the best arbitrage.
HARRY DENT: Exactly. Well you know, real quick Jason, real estate also is—it’s not one industry. Every sector has a different age group, and right now, apartment basically buying affordable small homes and renting them out is the sweet spot. The Echo Boom is in a positive rental cycle into 2017 or 18. More and more people can’t afford homes, or get blank loans, so that’s the best place. But a few years from now, when we see this next real estate downturn, buying affordable starter homes is going to be the sweet spot going out for many years with this generation. So it goes from apartments that peak in 26, 27, starter homes 31, 32, trade up homes 41, 42 by age. There’s a first vacation surge in the late 40s, and there’s a second one in the late 50s to early to mid 60s. So, vacation homes, if they crash—they’re the ones that crash the most. I’d love to buy beachfront property and mountain property and stuff a few years from now when we get another crash. Baby boomers will have one more round of vacation home buying, but the Echo Booms buying affordable starter homes in the next decade, that’ll be the best part of the real estate market. So like you say, rent big homes and own a lot of small homes you can buy at replacement cost or below, and rent out as positive cash flow. Because where can you get—I mean, you can’t buy bonds anymore and get any decent cash flow. Rental real estate is about the only place you can get it.
JASON HARTMAN: Yeah, yeah. I know. It’s—what is it, the TINA, There Is No Alternative, right? Or there is no better alternative. Yeah, that’s true. And then here you also look at that demographic thing of the Echo Boomers, or Generation Y, the Millenials…they’re saddled with so much student loan debt! I mean, that student loan debt bubble is over a trillion dollars! Is that the next big bubble to pop?
HARRY DENT: Yeah, there’s no question. Here you’ve got this generation entering the economy in rising numbers, just like the Bob Hope generation did in the 1930s in a bad economy. These people are not going to spend as much as baby boomers, they’re not going to borrow as much, they’re going to be a little bit more conservative about everything, and then yeah, they’ve got these massive student loans! I mean, education—people talk about healthcare inflation. The greatest inflation has come in education costs. So these poor kids now, it could cost $200,000+ just to go to a—well, 2 or $300,000 to go to an Ivy League school and get a great degree. Okay, maybe you make $20,000 more a year. Does that really…and then these people have to go into debt to get this. It’s…it’s very grim. And, they’re facing a falling housing market, which nobody’s seen in our lifetime. They’re facing difficult loans. The baby boomers could borrow and buy with no money down and low interest rates and everything was subsidized by the government, and Fannie Mae, and Freddie Mac. So this Echo generation is facing a new normal, and it’s going to shape their personalities. They’re going to be stronger because of it, and more fiscally responsible than the crazy baby boomers. We grew up in the ‘50s and ‘60s, everything hunky-dory. And then baby boomers never really saved for retirement.
JASON HARTMAN: Yeah, it’s amazing because that’s gonna keep them renting for a long time, isn’t it?
HARRY DENT: Yeah, and it’s going to keep them in the workforce longer! Which is another problem for these Echo Boomers. This happened in the Great Depression. Baby boomers will decide, gosh, I can’t retire at 63, 65. I don’t have any savings. The economy’s down, my rate is not as good, whatever—I’m going to have to work longer, stay in the workforce for as long—and it’s going to make it harder for these kids to get good jobs and to pay off their darn student loans.
JASON HARTMAN: Yeah, it really is. Well, Harry, what about the Fed cycles? That was interesting what you said to me before we started recording, when you were talking about the Fed cycles, and how the Fed acts. They act in a sort of a cyclical fashion, don’t they?
HARRY DENT: Well, yeah. Everybody keeps saying, oh, we’re finally in a sustainable recovery. No! It’s been the same thing over and over again. We went and had this big crash, it took massive amounts of quantitative easing. I don’t know anybody—the most progressive, most liberal economists would have forecast the Fed would have put as much money into the economy as it did. They didn’t even do this in World War II to this degree. This is unprecedented, and it’s around the world. Japan’s doing it, Europe’s doing it. China’s doing it. Everybody is just putting massive amounts of money to stop a recession from happening. But stimulus is short term. It’s like any drug. It’s like a cup of coffee. You take it, it wakes you up a little bit, you feel a little better, and then it wears off and you actually feel worse. So, what we’ve noticed is a 7-quarter cycle. When the economy gets weak—and it gets weak every 7 quarters—we go back, early 2011 and before that, I think it was mid 2009 and all that. Every 7 quarters the economy gets weak again, hits zero or below, even after massive stimulus, so the government steps in and stimulates strongly again. Even stronger. It always takes more of a drug to have less and less effect. So once the stimulus starts, you get 3-4 quarters of growing GDP. 1, 2, 3% or so. And then, despite the stimulus, you get a slowing, and the stimulus doesn’t work anymore. So ever 7 quarters. But what it says, is that we’ve had 2 quarters of GDP growth since the last low in 4th quarter 2012. The Fed stepped in with QE3, of course. And it was stronger than QE2, as usual. So now we’ve had 2 quarters of growth. 3rd quarter should be as good or better. And somewhere between the 4th quarter and 1st quarter of next year, this model would say hey, we’re gonna start falling off. Even if they don’t paper. The stimulus will just fail. Only so many people can refinance, or go out and—basically, stimulus is getting people to purchase something today that they would have purchased tomorrow. And so it keeps the economy going. But that’s why it doesn’t work—it wears off.
JASON HARTMAN: Right, it’s just bringing purchases forward, like the Cash for Clunkers disaster.
HARRY DENT: Yeah, Cash for Clunkers. And same thing with housing—
JASON HARTMAN: They did it with, what was that, the $7500 credit—I can’t even remember, it was a few years ago. But if you go buy a house this year, you’ll get a credit. Stupid. None of that stuff really works.
HARRY DENT: All you’re doing is borrowing from the future. Then the future comes, nobody needs a home, and it’s like oops—the economy’s weak again. And what this cycle would say is that the 1st, 2nd, and 3rd quarter of next year—again, even if the Fed doesn’t taper, and they’re probably gonna taper some time in the next few months—that the economy is gonna go back to zero! So that’s enough to help trigger a stock crash. That’s gonna hurt real estate demand, if people see a slowing economy. But my thing is look. How many cycles of this? How many times can the Fed stimulate, save the economy, goose it up, and then it flops over again before people get it? Look, we took Viagra and we didn’t get the result. Something’s wrong here. And something is wrong here! The demographic trends are horrible! The debt ratios are unprecedented! We need to weed this stuff out of our economy, and that’s what the Great Depression was. It was 3 years of a huge financial detox. But we came screaming out of that downturn. We’re not coming screaming out of this, and it’s taking massive stimulus because we’re not restructuring our debt. We’re not letting banks and businesses fail. The whole foundation of the free market capitalist system is failure! Without failure, you don’t get innovation. Governments are not allowing anything to fail. They’re not allowing banks to fail, companies to fail, not allowing the economy to slow down and restructure, not allowing debt to be leveraged. If they hadn’t given the banks trillions of dollars, the banks would have had to either go under, or write down and restructure a lot of loans, which would have reduced the debt burden for households and businesses. It would have given us more cash flow. That’s a real stimulus plan. That goes at the heart of the problem. Instead, the governments are giving banks money for free. The banks then say, we don’t have to write down loans—the Fed keeps bailing us out, so we’ll just wait for housing to come back one day, and in Goldilocks land, they never have to write off the loans. Well, that’s not gonna happen, but that’s what everybody’s doing. Because the government’s creating that illusion.
JASON HARTMAN: It’s a silly business plan, but the problem is, when you have politicians who wanna make—get this instant gratification during their tenure, they—there’s all kinds of mal-investment, and this is just not a prudent, real way to manage an economy, is it?
HARRY DENT: Well, I’d call it, Jason, killing the golden goose. Basically, free market capitalism needs inflation. It stimulates massive investment and innovation. It needs deflation. It needs booms, it needs busts. If you don’t deleverage financial and debt bubbles, they just keep weighing on you, a 300 pound backpack! And that’s what Japan has! Japan has grown at zero, zero inflation, zero GDP growth, in fact slightly negative for the last 20 years, because they’re in a coma economy-wise! Endless stimulus, they’re like an emergency room on life support, barely alive, because they’re not letting the system flush out the excesses. Again, how’s the next generation going to afford real estate if it doesn’t come down in price? How are they going to move forward all these student loans and all these baby boomers have all this massive debt against real estate that isn’t worth that, that really will revert like you say, always to the mean replacement costs. Real estate throughout history always goes back to replacement cost! That’s how it goes up. It doesn’t go up with the economy! It doesn’t go up like stocks with earnings! Replacement cost is what drives real estate! And real estate is gonna go down further. And until the next generation can afford it again, and they’ll start buying houses.
JASON HARTMAN: That means, to the listeners, if you’re buying real estate for more than—depending on the market—$85 to say $120 per square foot, you’re in that bubble territory, where either the price of all those materials needs to go up, or you just have to keep having the speculative kind of scenario where you get mal-investment, and the greater fool will come along after you. No matter what I pay, some greater fool will come along and pay more, that’s the greater fool theory. But that’s a speculative, dangerous game, rather than a prudent long-term cash flow gain on sensible property. So I couldn’t agree more, Harry, it’s a very good point. Talk to us for a moment, before you go, about China. I mean, I remember back in the late ‘80s there was this xenophobia sweeping our country, it seemed like. Everybody thought Japan was gonna take over. They bought Rockefeller Center. They were buying movie studios. They were buying up every piece of trophy real estate in the country. And it turns out, not so much. Now maybe that’s—maybe China’s taking their place, huh?
HARRY DENT: Well, a few people like Sir John Templeton saw the great boom of the ‘90s like we did, but nobody saw the collapse of Japan. In the late ‘80s, we were saying Japan is gonna have a 12 – 14 year major downturn. Their demographics is peaking, they’ve got the biggest real estate bubble in the world, back then. It’s gonna burst. And people thought we were crazy. This is inevitable! It’s the same in China. China’s demographics are peaking now. They kind of plateaued for a decade. Now, China’s an emerging country. Most emerging countries have positive demographic trends out for decades! Some of them for several decades. So, China’s the first to peak because of its one-child policy, but at the same time, they have been shoving people. The trend in all emerging countries is for people to move from rural areas to urban areas where they earn three times as much money and then become whole new consumers. But China’s just been shoving people by boatloads. They’ve move 250 million people in the last decade from rural areas to urban! It’s the biggest social dislocation ever. They are building massive housing. They’ve got 25% of houses in cities are vacant. Hooked up to electricity and not using them. You’ve got whole cities like Ordos and this new Parisian city that are built for a million people that are just empty. The great mall of America in China, the largest mall, twice as large as the great mall in Minnesota, the great American mall. Totally empty. And—here’s the kicker. Here’s what I think nobody sees. In Chinese cities, they are 53% urban now. 31% of the people in these cities—221 million people out of 700 million—are not registered urban citizens. They’re like illegal Mexican—literally—like illegal Mexican immigrants in the United States. They don’t have access to services, they’re not considered citizens. They’re considered citizens back in their rural province that they moved from, but the world economy slows down as we’re seeing, and the export machine and the overbuilding machine in China is forced to slow down. These are the people with no skills sitting in cities fresh off the farms. They’re gonna lose their jobs first, and you know what I think they’re gonna do? I think they’re gonna do the same thing illegal Mexicans are doing. People don’t realize, illegal Mexicans now are moving back to Mexico faster than Mexicans are moving to the US anymore. We have net negative immigration, and it’s only going to get worse. I think these underclass in these cities, these rural citizens, are going to have to be a lot of (unintelligible) to move back to rural areas where they can be a citizen, can get services, and most of all can survive on the land. How are these people gonna survive when unemployment goes up in China? I mean, they have overbuilt real estate, and infrastructure, more than any country ever in—Southeast Asia had a major crash because of this! And China’s outdone them 2 to 1 for twice as long, so the China bubble is gonna burst. It’s a question of when, and it’s gonna be the hardest landing of this century.
JASON HARTMAN: China has ghost cities. I mean, it’s mind boggling. It really is.
HARRY DENT: A million! Ordos is built for a million people and they have 70,000 people living.
JASON HARTMAN: It’s—that must be so weird! It must be like living in a Twilight Zone episode!
HARRY DENT: Who do you have a barbeque with? Who do you buy stuff from? It’s crazy, nobody there.
JASON HARTMAN: It’s really crazy. Hey but, explain one thing for the people that may not be that familiar with your work. Just explain the concept, Harry if you would, of peaking demographics. You talked about how China has peaking demographics, and that means, I think, people are at a certain age where they’re spending, working, and all is well, but not replacing themselves, right?
HARRY DENT: Yeah, but you know, the most fundamental concept is the family life cycle of spending. When you enter—in the United States, for example, we enter the workforce on average at age 20. You earn and spend more money, get married at 26, have our kids on average at 28, buy our first home at 31, buy our trade-up home, our largest home at 41, spend the most money including furnishings and furniture at 46, buy the most cars at 53. But, the peak of spending in the United States, and for most developed countries, is right around 46. So, from 20 to 46—now, that’s 26 years. The baby boom generation—the largest generation in history—went through that accelerated cycle. All the housing, outside of apartments, all of the owned housing is bought between age 27 to 41. So that’s why housing did so well and we had such a bubble. There was just unbelievable demand from baby boomers against limited supply, especially in coastal areas. So that’s why we had the bubble. The boom—46 year lag on the baby boom birth index. 1983 to 2007, something we saw decades ago—we’d have a boom, and from 2008 to 2023, the economy would slow down because there’d be less people moving their peak spending, buying houses. And of course, buying houses is where people borrow the most money. So, borrowing accelerates, through age 27 to 41, and it slows down. So, demographics can tell you from cradle to grave, and macro to micro, total spending, total borrowing, total investing, all these sort of things, what’s going to have in the future, economists don’t even look at it. All they look at is the replacement rate, and the United States is close to replacing ourselves, so we go sideways. Most southern, central European countries, East Asian countries, are not even close to replacing themselves, and they’re just going to basically shrink for decades. Shrink! How is a country gonna grow when its workforce and its population is actually shrinking? These are all things you can see; that’s the point. This is a piece of cake. Economists don’t even look at it.
JASON HARTMAN: Yeah, it really is, it really is. We talked about Japan—is Japan going to default on their debt? I mean, they’ve got a huge debt problem too.
HARRY DENT: Yeah, at some point they’re—a country like the US probably can’t, because of the reserve of currency. But yeah, Japan has gone from 60% debt-to-GDP ratio, and the government debt’s 250% and it’s still rising because they’re just trying to stimulate their way out of a bad demographic decline, and they’re not allowing private debt to de-leverage, and they’re only increasing government debt to stimulate the economy like we’re doing. It is an absolute disaster. The only reason they haven’t defaulted already is because they have—unlike us where 50% of our bonds are still bought by foreigners—their internal system, their pension plans, their government, buy all their bonds. Their populace does. Only 7% are foreign. They basically have kept interest rates below 1%, even lower than ours. And if interest rates just rose to historical standards in Japan, which is 5 to 6%, they would be bankrupt overnight. The interest on their debt would be more than their entire government revenue. So yeah, Japan is gonna default at some point. They have positive demographics from an Echo Boom right now. They’re stimulating even harder, so I don’t see Japan triggering this next downturn, but there is a downturn, and they get hit, as John Walton said, they’re like a bug looking for a windshield. They are—they have the fastest aging society in the world, and the highest debt. I mean, they’re just deadly.
JASON HARTMAN: And the longest living. They live the longest!
HARRY DENT: Which is actually a problem for them.
JASON HARTMAN: Good point, good point. Harry, I know you’ve gotta go. Give out your website, if you would.
HARRY DENT: Yeah, the best place to go is www.harrydent.com. We have a free daily newsletter called Survive and Prosper. It’s great content, it’s just a way for people to get to know us and learn more about what we think about current events and new research that comes out, etcetera. That’s what I recommend, just go to that website, and all you have to do is put in your email address and you’re on.
JASON HARTMAN: Okay, and then just another quickie—thank you for that. So it’s www.harrydent.com. And another quickie—anything you want to mention just real fast about Europe? Because of the huge mess there, and I just, kind of a closing concept is, I mean, things are so problematic around the world—you look at so many countries that are in such a pickle. That’s an understatement. Kind of a folksy way to say it. But, is the US really that bad, when you comparatively—I mean, it’s just a global economic fiasco, but maybe we’re in a better position than anybody else? Or a least bad position?
HARRY DENT: No, no, that’s exactly it. The demographics—everybody goes off this cliff in the developed world. But some countries just go more sideways, and then don’t decline as steep. Here’s the thing about Europe. Europe’s already in deep trouble, and they haven’t gone off their cliff yet! Japan did it first in the ‘90s, and then the US, 2008. And again, we forecast all of that ahead of time. Much of Europe goes off that same downward demographic cliff starting in 2014 next year, including Germany, Austria, Switzerland, England. These are the strongest countries over there! The weakest are already in depressions, and they’re aging even faster. But Germany is supposed to hold up Europe, and Germany is gonna age unbelievably fast. They’re already covering over commercial and residential real estate developments and turning them back into parks to hide the demographic decline. So, there’s parts of the world like southern Europe, central Europe, east Asia including China, but Japan, Singapore, South Korea, Taiwan—all those strong countries—go off very steep cliffs over time. US, northern Europe, like Scandinavia, England, France, go more sideways over time. And Australia and New Zealand. So there’s stronger and weaker patches. And yes, we’re in the stronger group, where we at least get to go sideways over coming decades, and don’t just fall. It’s Japan and Europe—European countries are going to shrink 30, 40, 50%! It’s just absolutely unprecedented.
JASON HARTMAN: You cannot—there’s nothing you can do about that. That’s just—
HARRY DENT: Well, let me give this thought for people in real estate down the road. What happens when there’s more people dying—which means, you become a seller—than young people buying? And why has Japan real estate not turned around after 22 years of decline? Even when the next young generation—because you got more old people dying than buying, and you got more adult diapers being sold than baby diapers.
JASON HARTMAN: Yeah, that’s a crazy scenario. The people go away, but the properties are still there. That’s not good for prices, right?
HARRY DENT: Yeah, that’s supply. Those are homes that don’t need to be built, because they just got vacated by a dead person.
JASON HARTMAN: Yeah. Absolutely. Supply and demand. Well, Harry Dent, thank you so much for joining us today. You can order the new book coming out January 7th on Amazon, you can pre-order it, and it’s called The Demographic Cliff, and www.harrydent.com. Thanks for coming back on the show a third time. It was awesome.
HARRY DENT: Okay, thank you Jason.
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