The Great Crash Ahead: Strategies for a World Turned Upside Down - Softcover

Dent Jr., Harry S.

Softcover

ISBN 10: 1451641559 ISBN 13: 9781451641554

Publisher: Free Press, 2012

Synopsis

Now available in paperback, from the bestselling author of The Great Depression Ahead, a book that continues to show readers how to weather the storm in these tough economic times by cautioning against the misguided beliefs that lead to bad investment decisions.

With incisive critical ana lysis and historical examples, The Great Crash Ahead lays bare the traditional assumptions of economics, outlining why the next financial crash and crisis is inevitable, and just around the corner— coming between mid-2012 and early 2015. Widely respected in the financial world for his accurate forecasts, Harry S. Dent, Jr., shows that the government doesn’t drive our economy, consumers and businesses do; that the Fed does not create most of the money in our economy, the private banking system does. This necessary and illuminating book gives very clear strategies for prospering in the challenging decade ahead . . . a world turned upside down.

About this title

About the Author:

Harry S. Dent, Jr. is the president of the H.S. Dent Foundation, whose mission is "Helping People Understand Change." He is the founder of HS Dent, which publishes the HS Dent Forecast and oversees the HS Dent Financial Advisors Network. He is the author of the New York Times bestseller, The Great Depression Ahead, as well as of The Great Boom Ahead, in which he stood virtually alone in accurately forecasting the unanticipated "boom" of the 1990s. A Harvard MBA, Fortune 100 consultant, new venture investor, and noted speaker, Mr. Dent is a highly respected figure in his field.

Rodney Johnson is the president of HS Dent, an independent economic research and investment management firm. He oversees the daily operations of the companies and is a regular contributor to the HS Forecast and the HS Dent Perspective. A graduate of Georgetown University and Southern Methodist University, Mr. Johnson is a frequent guest on radio and television programs to discuss economic changes in the United States and around the world.

Excerpt. © Reprinted by permission. All rights reserved.:

The Great Crash Ahead CHAPTER 1

Deflation Is the Trend—and It Changes Everything

It wasn’t supposed to be like this. For over 30 years Patti, the godmother of my [Rodney Johnson’s] children and wonderful friend, took the steps that were supposed to ensure not only her success, but also her financial security. She graduated from Tulane University and worked her way up in several organizations, in which she consistently beat client expectations. She earned six figures, of which she saved and invested quite a bit. She worked overtime and weekends and traveled exhaustively. She was a “hot property.” Then she was fired in the summer of 2010.

Fired, laid off, downsized—whatever it was called, the latest company where she worked was acquired by another. During the process of integrating her unit into the succeeding firm, she and other executives were dismissed. It was typical. You get called into a meeting with higher-ups, at which you are told that the company is moving in a direction for which your services are no longer necessary. You are escorted to your office and a human resources representative watches you pack your things to ensure that you do not steal from or harm the company that you poured your life into for years—the company that you helped to make a success story and an acquisition target. Finally, you are marched off the premises like any other nondesirable who might have wandered in off the streets. Such is the way of corporate life.

If this had happened during the ordinary course of company evolutions in normal times, when mergers and acquisitions typically create gains and losses for investors and employees, perhaps it would not have been such a blow. But these are not what most of us would consider normal times. Patti walked out of that company in the summer of 2010 as a 50-year-old woman and into a job market that already held over 14 million unemployed people. She left with her savings and investments greatly diminished after the crash of 2008–2009, and she carries the burden of a home that continues to fall in value. It wasn’t supposed to be like this, but it is. Patti is just one of millions of casualties in what is a continuing economic catastrophe. The economic meat grinder is taking its toll, reducing not only what we as consumers and workers have in terms of gainful employment and assets, but also taking away some of our ideas of what we can achieve. In short, for many, tomorrow looks grim.

As we sat around Patti’s kitchen table discussing this state of affairs, she was downtrodden but defiant about her employment. This stint of work was over, for all intents and purposes, but she would live to work again. Like the mythical phoenix, she would rise up in perhaps a different form, developing a niche to service groups like her previous clients, writing a book about her area of expertise—on-boarding large corporate clients for complex services—or simply find a similar position in another company. This was not her first rodeo. She had successfully reinvented herself before. While the work situation definitely caused her concern, it was nothing compared to the financial loss in her portfolio and her sheer lack of clarity about her financial future, which caused something closer to despair.

“I should have spent it,” she said. “Instead of socking it away, meeting with my financial advisor on a regular basis, and tweaking my investments, I should have blown it on all the vacations I wanted to take. Even though I was responsible, saving and paying my own bills, never spending beyond my means, I’m suffering for it. Other people blew up their own situations, and at the same time the government did absolutely nothing to stop financial institutions run amok. Here I am paying the price.”

We just witnessed the greatest credit and real estate bubble in modern history. Just as debt, housing, stocks, commodity, and business values skyrocketed, they will now collapse and create the greatest deflationary environment since the 1930s. Do you know how to invest and navigate your business and career in an environment that you have never seen before?

Patti’s points are well taken, and her sentiments are shared by many across the country and around the globe. While most people understand some of the events and trends that led us here, it is still hard to grasp why this situation has become so much bigger, so much more encompassing, than anything since the Great Depression.

Patti not only can survive, but she can thrive, as will a minority of Americans and citizens around the world. Even everyday citizens in China and India will feel this global deflationary crisis. Patti will continue to keep her financial house in order, working more and saving more than she would have otherwise. But the questions and doubts she raises deserve answers. We have just lived through the greatest economic bubble in the history of the world, and now we are dealing with the aftermath as that bubble deflates. The bones and debris are scattered everywhere—investments, jobs, education, retirement, politics—nothing is left untouched. Our net worth has been greatly reduced. The median family earns less income today than 10 years ago. We are going backward.

As we go through what will be a long and difficult period of adjustment, we have choices. We can choose to bury our heads in the sand, ignoring the changing world around us and hoping for the best but doing nothing. Or we can choose to recognize that the era we just left—that time of growth and seemingly easy prosperity that marked most of the past three decades—is over. What lies ahead will be difficult, but through education and proactive efforts, we not only can see what lies ahead but also can profit from it. As you might expect, this book is all about choosing education and prosperity!

The trends for the coming decade are crystal clear: we are going to experience a deeper downturn and deflation in prices, not inflation. We call this the Winter Season; it comes predictably once in a lifetime, currently every 80 years, which means that very few people will understand what is happening.

· The largest generation in history will be spending less and saving more for retirement, which are trends that follow aging. The continued aging of our population as well as of the populations of developed countries around the world is deflationary—just ask Japan.

· The greatest credit and real estate bubble in history will continue to deleverage and deflate. The US government and most world governments have implemented extreme stimulus measures to prevent financial systems from melting down as they began to do in late 2008. These measures will fail, probably by early to mid-2013 forward and certainly by early 2014. We will undergo the first extreme deflationary crisis since 1930–1933, with all major investments crashing. We will suffer business, bank, and job losses unlike anything we have ever dealt with in our lifetimes. Crashes of this magnitude won’t be repeated for another 60 years or more.

· China is leading a global bubble by greatly overbuilding industrial capacity, real estate, and infrastructure. Most of the emerging world, along with Canada, Australia, and New Zealand, is feeding China’s bubble with materials and energy. The bursting of China’s bubble together with the peaking of a very reliable 29- to 30-year commodity cycle will make this a global downturn despite long-term rising demographic trends in the emerging world.

We’re here to wake you up to the greatest financial crisis of your lifetime and to get you onto our lifeboat to save your family and business from financial ruin before it’s too late!

This book can be thought of as having four sections. The first part (Chapters 1 and 2) discusses how we got here, including the driving forces of demographics and consumption. Starting in the Roaring Twenties boom, demographics quickly became the key driving force in the world economy, as middle-class living standards spread. This force will continue to accelerate among emerging countries as billions of people see their income and consumption levels grow. Economists do not understand the impacts of this most critical factor, which is why they did not predict the magnitude of the global boom and why they now do not perceive the magnitude of the inevitable global slowdown ahead.

The second section of the book (Chapters 3 through 5) describes where we are now: in an economic Winter Season, with a massive debt overhang that must be worked out. We are referring to the debt bubble that occurred primarily in the private sector, not to the US federal debt, which is huge on its own. From 2000 to 2008, private debt more than doubled, from $20 trillion to $42 trillion, whereas government debt grew from $5 trillion to $10 trillion over the same period. Unfortunately, government debt, which has since grown to $16 trillion, continues to rise. The most pressing problem in the government sector is $46 trillion to $66 trillion in unfunded liabilities for Social Security and Medicare/Medicaid. Our system cannot continue to function and certainly cannot make any real attempt at a recovery with all of this debt! In the next decade, particularly between 2012 and 2015, we will undergo the greatest debt restructuring in history, and that destruction of debt will actually cause deflation, not inflation. This is what makes the coming economic Winter Season so different from the last extended downturn in our economy, from 1969 to 1982. That period represented an economic Summer Season, in which we experienced a wave of inflation and innovation. The investment and business strategies that work in a deflationary period are very different from and are often the exact opposite of what works during inflation.

The third part (Chapters 6 through 8) illustrates why we will not be coming out of this crisis anytime soon. We identify that the emerging world, led by China, has its own bursting bubble, which includes commodity prices. We also look at why the seemingly successful policies of the government have only “kicked the can down the road,” making the debt crisis and mortgage crisis worse. These policies cannot work against the massive downward trends in demographics and debt deleveraging.

In the final section (Chapters 9 through 11), we discuss how we as a nation, as investors, as business owners, and as citizens can best position ourselves in order not just to survive the next several years, but to thrive! The adversity we face today is simply a different set of opportunities and challenges than those of yesterday. As the weather reflects the seasons, we see winter coming and prepare by stocking up on firewood, buying coats, et cetera. We store away the water skis and bring out the snow skis! Every season has its opportunities and challenges. You simply need to change your strategies for each season. We finish in Chapter 12 with a look at not just big changes, but sweeping, revolutionary-type changes that are occurring here and around the world. Just as the Industrial Revolution radically changed the world starting in the late 1700s, the Information Age is not even close to finishing what was started in the 1970s and 1980s.

Twenty years ago we forecast an economic Winter Season that would stretch from 2008 to 2023. The season has arrived, and it brings with it great challenges and great opportunities. Once we understand what is possible and let go of yesterday, we can begin rebuilding.
How We Got Here: 25 Years of Economic History in a Few Short Pages

Looking back, the trajectory of the “bubble economy” is obvious, but at its height, many people were describing it as unprecedented progress. The typical way of describing how we got here is usually done by chronicling business and policy developments of the last 25 years. It goes something like this:

In the mid-1990s our economy was doing well, as we had moderate interest rates, rising government revenue, and a well-functioning capital market. The United States had shaken off the problems of the 1970s and early 1980s and was riding the wave of productivity and earnings that came from the invention of desktop computing and the advent of the internet. The possibilities seemed limitless.

As the internet craze took off, there was a mad rush to take companies public, which was met with an equally mad rush on the part of investors to get in on the speculative investment boom. This was fueled not only by the obvious game-changing nature of the internet, but also by what the internet brought us: day trading and instant access to our investments. Suddenly, people were discussing stocks to buy just like they would discuss dinner choices at a restaurant (“I think I’ll have some Cisco and Yahoo!, but I’m torn because the Intel and the JDS Uniphase sound so good!”). Yields on bonds were falling, so equities seemed to be the overwhelming choice for growing wealth.

After languishing through the 1970s virtually unchanged, the Dow Jones Industrial Average (Dow) shot higher over the next two decades. The index increased by 325% in the 1980s and then by over 400% in the 1990s. By 1998 and 1999, CNBC was a household name, Amazon no longer was just a river in South America, and a sock puppet (Pets.com) was quickly becoming the most reviled figure on television. The rush to capitalize on the internet and investment frenzy led to the dot.com bubble and eventually to the bust of 2000–2002, which ended with many portfolios in shambles and a recession to boot. Fortunes were lost, and retirement plans were wiped out. To help the economy recover, the Fed lowered interest rates in early 2001. It didn’t help much. The economy did not fall much further, but it also did not make big gains. The year 2001 was spent eating through excess capacity and dealing with a short, shallow recession. Then tragedy struck: 9/11.

The markets were closed for four days. The world was in a panic. There were wild estimates as to what would happen when the markets did reopen. One thing was sure: interest rates would be dramatically lower. The Federal Reserve took swift, dramatic steps to flood the US economy with enough buying power to keep a questionable situation from turning into a cascade of bad events.1 The Fed had already lowered short-term rates from 6% to 3.5% over the course of 2001 leading up to 9/11. After that fateful day, the Fed lowered short-term rates another 1.75% in a matter of months and yet another 0.75% during 2002 and 2003, finally allowing short-term rates to bottom at 1% in that cycle. In just over two short years, the Federal Reserve lowered interest rates from 6% to 1%. It was determined to make our economy move, and move it did—although perhaps not in the way that the Fed intended.

As the Fed was aggressively lowering interest rates, lenders were aggressively stepping up their efforts to shovel money out of the door. Cheap dollars meant that loans were easy to afford, so borrowers could take out bigger and bigger loans. What to do with all of those borrowed dollars? Buy the biggest leveraged asset possible, of course! Americans went on a home-buying, condo-buying, investment-property buying binge, especially after they had lost in tech stocks and were looking for what seemed to be more solid investments. Although a family might be able to afford a $1,500 mortgage payment, the total size of their loan would change depending on the interest rate. At a 7% mortgage, the family could afford to borrow $250,000. At 5...

About this edition

• Publisher: Free Press
• Publication date: 2012
• ISBN 10: 1451641559
• ISBN 13: 9781451641554
• Binding: Paperback
• Number of pages: 368